Markets

Brexit hangs over Eucolait meeting

By Jo Bills

FRESH AGENDA was fortunate enough to attend and present our global market outlook at the September Eucolait meeting in Brussels last month.

Eucolait, or the European Association of Dairy Trade, represents the interests of European exporters, importers and wholesalers of dairy products.

Founded in 1959, Eucolait has over 500 member companies in 16 EU Member States and a number of associate members outside the EU.

We were told this year’s September meeting was particularly well-attended — an indication of the uncertainty facing the global dairy market at present.

Not surprisingly for such a trade-focussed gathering as this, the impacts of Brexit and US-initiated trade conflicts were hot topics of discussion.

With just six months until Brexit is a reality — as of the 29th of March 2019 — it is startling to hear the impact of the uncertainty on the ground.

There is significant contingency planning underway for traders who have no idea what the new reality for trade with the UK will be.

Whatever the final deal, EU traders are preparing for increased costs that come with the end of “frictionless movement” of products to a dairy deficit market in the UK.

Any investment in infrastructure under the circumstances is seen as extremely risky, and caution is the order of the day.

For UK importers there are moves to diversify their supply base and, under the circumstances, a closer alliance with the US could be on the cards.

Ireland will be most affected, and as an Irish representative at the meeting observed, Brexit will mean that exporters won’t be trading with natural partners and the outcome will be added cost throughout the supply chain.

In terms of the Trump Administration’s approach to trade there was acknowledgement that under the leadership of EU Commission president Jean-Claude Juncker direct trade conflict has been successfully de-escalated — at least for the time-being.

EU dairy is an easy target for the US given the significant trade deficit that exists, but for now there has been no direct impact.

The EU is aggressively pursuing export market diversification through free trade agreements.

A senior EU trade negotiator briefed Eucolait members on the modernisation of the EU-Mexico FTA which has recently been negotiated.

Improving reciprocal access was seen as an important outcome for the EU, a lesson learnt after the closure of the large Russian market, and Mexico, given its reliance on an increasingly unreliable trading partner in the US.

The Mexico agreement was welcomed by Eucolait members, but one of the most interesting points was the “protection” of geographical indications (GIs) baked into the deal.

A geographical indication, as defined by the European Commission, is a distinctive sign used to identify a product as originating in the territory of a particular country, region or locality where its quality, reputation or other characteristic is linked to its geographical origin.

The protection of GIs is now a fundamental baseline in the EU’s negotiating position with any trading partner.

The EU’s insistence on GIs like Italian Parmesan and French Roquefort protects billions of euros of agricultural export value, particularly for France, Spain and Italy.

It is central to EU trade policy and something Brussels is prepared to defend to the hilt — a point that was underlined in the Eucolait meeting.

The EU has an ambitious free-trade agenda — in contrast to the isolationist US approach, but with GIs at the core of these negotiations — including those that are starting with Australia — EU producers of protected cheese varieties will not face foreign competition at home or abroad.

The quirks of EU policy were further underlined by the presentation from a senior DG Agri bureaucrat on the machinations of intervention.

Having built the large SMP stockpile that continues to overhang the market and distort the relative pricing of fat and protein, the official maintained the buying and tendering process will continue with caution, so as not to disrupt the market!

Despite the move to twice-monthly tender sales from September onwards, it seems most Eucolait members expect the intervention stockpile will take another 15 to 18 months to clear.

Finally, following a hot and dry summer for large swathes of Europe, there was a significant discussion about the ongoing impacts on milk production.

While milk growth has rebounded in a number of member states, it was acknowledged that production had been supported on many farms by drawing down feed stores which are usually deployed in autumn and winter.

On this basis the EU Commission’s Market Milk Observatory (MMO) revised its forecast for EU milk production down to 0.9 per cent growth in 2018, implying the remainder of the year will be down on the previous year.

As the impacts of depleted feed reserves linger into 2019, the MMO expects moderate growth of 0.8 per cent to 0.9 per cent in 2019.

It’s a more subdued production outlook that could provide some support for commodity prices.

• Jo Bills is a Director at www.freshagenda.com.au