Euro sign
May 17, 2018

Brexit could Create Problems for EU Dairy Producers

 |  By: Fran Howard

The European Union could soon cut subsidies to dairy farmers, and the blame is being put squarely on the back of the United Kingdom and its pending exit from the trading bloc. Due to higher labor costs and stricter environmental regulations in Europe compared to those in the United States, EU dairy producers have a higher cost of production, and without subsidies, EU producers would find it harder to compete with the United States and New Zealand in world dairy markets.

“The United Kingdom contributes around €12 billion each year to the European Commission. When the United Kingdom exits the European Union, it will create a huge shortfall in the Commission’s budget, which totaled €145 billion in 2015,” notes Sarina Sharp, analyst with the Daily Dairy Report. “Unlike national governments, the European Commission cannot run a deficit, so the lower revenue will immediately translate into spending cuts.”

A large share of the cuts will likely come from Common Agricultural Policy (CAP) spending. In fact, the European Commission has already proposed cutting CAP spending by €17 billion. A cut that large would shrink CAP spending to 30% of the total EC budget, down from the current 39%, or €59 billion, Sharp notes.

EU Commissioner for Agriculture and Rural Affairs Phil Hogan has already warned about upcoming cuts. “In the absence of more money from member states, there will be a cut to the CAP budget, and there’s no point trying to sugar-coat that fact,” Hogan said.

Despite Europe’s move toward operating under a more market-oriented dairy policy by eliminating milk quotas, subsidies still play a huge role dairy farmer incomes. For instance, according to Teagasc, the average Irish farmer received €17,804, or 75% of farm income, in subsidies in 2016. “The proposed budget would shrink direct payments to farmers in Ireland and 16 other nations by 3.9%, with lesser cuts to the remaining 10 members of the EU-27,” she notes.

Not surprisingly, the European Union’s largest farm operations are likely to see the largest hits from cuts in CAP spending. “The European Commission proposes capping direct payments at €60,000, and Hogan intends to announce a plan to redistribute payments to better protect small- and medium-sized farms from a painful decline in subsidy payments,” Sharp says. “That’s not likely to sit well with dairy operations that have taken on considerable expense to expand in the absence of milk quotas and that are now too large for some subsidies.”

If dairy subsidies are cut, EU dairy producers would be more exposed to market forces. Theoretically, Sharp notes that producers could be quicker to scale back production when margins tighten or expand when milk prices are high. However, processors and cooperatives can also absorb low prices for a while before passing them on their suppliers, and they can wait to pass along high prices when they need to shore up their own balance sheets. “Eventually, though, low dairy product prices translate into low farm-gate milk prices, but the timing can be quite delayed, distorting market signals,” Sharp adds.

Moreover, if pain at the farm level becomes too intense, the European Commission could once again choose to intervene. Since quota ended in March 2015, the Commission has paid producers to temporarily reduce production and purchased massive amounts of skim milk powder to prevent that market from crashing.