Would the UK dairy market benefit from quitting the EU?

David Cameron’s proposal of a referendum on an exit or renegotiated position in the EU raises a number of issues, although with five years to go, there are more questions than answers.

At best, staying in would be a version of the current EU, with the single market taking a priority for all members, with the eurozone an important sub-group. This would provide for a CAP involving market intervention, SFP, environmental schemes, evidence-based NVZs – possibly extended to phosphates in river catchments – and animal traceability regulations.

Currently the euro is the cornerstone of the EU, with only the UK, Denmark and to an extent Sweden with an opt-out; the other seven countries are technically waiting for convergence before joining.

If the UK left the EU it is likely the UK would remain part of the European Economic Area – the free trade area that includes Norway, Iceland and Liechtenstein. This enables the free movement of goods, services, capital and people, with exclusions for agriculture and fisheries.

A UK government could drop many of the CAP elements such as SFP, environmental payments, market intervention and grants, but would be unlikely to introduce trade barriers on food. The tariff barriers that exist between the EU and Norway or Switzerland would not be favoured by the main political parties, although animal health measures, including ID and traceability, together with environmental regulations such as NVZs, are likely to be maintained.

The UK is still likely to follow Norway’s lead and pay into the EU development funds for weaker EU members. The loss of SFP and environmental payments would be a significant loss of income to UK dairy farmers, unless replaced by some other support payments, which would almost certainly be linked to some form of “cross compliance”.

Unfettered milk production in the EU is likely to see supply/demand balanced with the global market determining EU milk price levels. Production in the UK has been unrestrained for nearly 10 years, with our supply/demand balance set through domestic product and import pricing. Cost-of-production pricing will add a new dimension, but a change in supply seems unlikely. So, for UK dairy markets it is hard to see a lot of difference either way; global and EU markets together with currency fluctuations will drive UK market pricing.

With market forces having less of an influence on UK farmgate pricing than previously – because more of the UK pricing is linked to production costs – there is less of a threat from EU oversupply other than to strain the dairy chain relationships at peaks and troughs in the cycle.

Meanwhile, back on the farm, it would be interesting to see what regulation would be given up following an exit. In general terms, politicians talk deregulation, but when things go wrong it is the deregulators that take the flack, so politicians are generally loathe to wind back controls. Better regulation, not less.

Even UKIP talks about a transitionary SFP instead of a New Zealand-style farming system without subsidy, so abolition may take a while. The problem is that when the dairy premium/SFP was introduced, the effect of direct support was to lower farmgate prices. Supply and demand still operate, but the price level is lowered by the level of support, so if you abolish the support, the farmgate price has to rise to achieve the same profit levels.

With free trade in agricultural products, this would not be possible due to the adjacent EU pushing subsidised product into the UK. The alternative could be a return to the deficiency payments system that existed prior to joining the EU, but this seems unlikely with the UK government’s attitude to agricultural subsidies. Some form of environmental payment linked to “cross compliance” seems more likely which, combined with lower market prices would most likely see dairy profit fall.