The Big Cheese: How Irish dairy is seeking to answer the Brexit question

Irish dairy has a track record of being responsive and resourceful when it comes to challenges – but how is it trying to respond to the latest threat posed by Brexit?

First, a look to the past: In addition to failing to measure or recognise the annual €3.8 billion of dairy sector expenditure in the Irish economy, another gross misrepresentation of Ireland’s dairy growth story is that it has been state-led by thought and deed.

This could not be further from the truth.

Indeed it has been one of the misfortunes of the timing of the abolition of EU milk quotas that it came, not just at a time when the Irish state post-2008 financial crisis was in austerity mode, but that Ireland had transitioned after 2007 from an area eligible for state aid supports of up to 30% to a nominal eligibility of 5% to 10% support maximum.

This combination of curbs on government spending and much-constrained EU state aid rules resulted in published figures from Enterprise Ireland showing state support of €60 million towards accumulated capital investment spend in the dairy processing sector, out of €800 million total expenditure in the sector in between 2010 and 2015 – with no state support for on-farm investment.

So, while not insubstantial or unappreciated, a total of 3% of the investment costs of dairy growth were provided by the state – and 97% were provided by the dairy sector.

Throughout dairy expansion, the dairy sector has demonstrated a capability of responding – largely based on its own resources – to opportunities and quite dramatic political and economic challenges and market volatilities.

This is particularly true as, when the EU announced the intention to abolish milk quotas, the ‘quid pro quo’ involved dramatically reducing all internal EU dairy market supports and abolishing export subsidies.

Examples of this responsiveness are:

Post-2015, when price and income volatility severely stretched dairy farmers’ capabilities, Irish milk processors (led by Glanbia) were the first global milk purchasers to introduce fixed milk pricing contracts;
In 2017 and 2018, when price volatility and very expensive borrowing costs again presented a barrier for dairy farmers in meeting their production aspirations, dairy processors (again led by Glanbia) introduced the Milk Flex loan concept, which has since been rolled out nationwide.

The reality of dairy growth, as with the ability of the sector to cope with Brexit and strategic market diversification, is that while the sector craves access to ‘patient capital’, its responses are fundamentally based on dairy sector capability and innovation.

Indeed, going back to the UK’s June 2016 Brexit vote, among the very first realisations (and material responses) was a recognition by the Irish dairy sector that, whatever the complexion of a UK exit from the EU, the pre-existing economic realities behind exporting large quantities of cheddar cheese to the UK was likely to be dramatically impacted.

Diversification

While cheese diversification in Ireland had been achieved in some sense by the manufacturing of Emmental, small mozzarella capabilities and farmhouse cheeses, these accounted for less than 30,000t out of a 200,000t total production of cheese.

The proximity and integration of the Irish and UK markets; the reduction in Britain’s milk production in the last milk quota years; and the forecast of a further reduction post-quotas, meant that Irish cheddar had a market of 60 million people within half-a-day’s drive, which provided an irresistible economic barrier to large-scale cheese diversification.

Brexit fundamentally and dramatically changed this perspective, introducing a range of issues for future Irish-UK cheese trade: from World Trade Organisation (WTO) tariffs of 60% of the value of a tonne of cheese; to very clear exposure to administrative and regulatory issues compounded by a highly ambiguous status for Northern Ireland dairy products, which to date have been hugely integrated into southern Irish dairy production.

In response, the main cheese manufacturing companies, with some support from the state (notwithstanding the restrictions in state aid supports highlighted above) have, between June 2016 and 2018, announced investments (joint ventures with international partners in some instances) amounting to an additional €500 million approximately.

These investments are geared towards both diversifying into new and novel cheese manufacturing categories – such as continental cheese (Glanbia), Mozzarella (Glanbia and Carbery), and Jarlsberg (Dairygold) – and into emerging international markets; while also looking at the balance of milk supply going to overall cheese manufacturing.

Solution?

A critical part of the ‘dairy Ireland’ capability in attempting to manage the UK/EU/Ireland trade relationship post-Brexit is therefore to be provided by having the increased capability of manufacturing up to 100,000t of non-cheddar cheese types, in effect removing one billion litres of Irish milk supply from the UK market.

These huge investments may not completely absorb or offset the Brexit disruption facing the Irish dairy sector, and the impact of Covid-19 and climate change challenges are likely to add further volatility and unpredictability.

Moreover, it should be noted that investments from some processors have faced or continue to face significant planning hurdles which impact on when they can make a tangible contribution to diversifying the Irish cheese product mix.

The contribution of these huge investments to Brexit-proofing the dairy sector clearly demonstrate an ongoing commitment to addressing real market (and non-market) events on a ‘heads-up’ basis – by investing in diversification and increased capability.

These investments, being joint ventures with international partners, also act as a barometer as to whether Ireland truly is open for international (dairy) business.

Ciaran Fitzgerald is a leading agri-food economist and former chairman of Meat Industry Ireland (MII).