UK dairy sector still hooked on commodities
the country is still too reliant on lower margin commodity goods,
leaving the domestic market exposed to foreign competition.
The UK trade deficit for dairy products rose by 20 per cent in 2005 to £893m, according to preliminary figures from the country's Milk Development Council (MDC).
The news will add to concerns that Britain's dairy industry is still falling short on added value product development, threatening to damage the sector's future.
MDC figures show the UK dairy trade deficit had already jumped up £300m in the five years before 2005, and rose eight per cent in 2004.
MDC economists warned last autumn this was because the UK continued to import large amounts of added value dairy, while exporting lower value commodities, like milk powders and bulk cream.
They said one example was Britain exporting butterfat as low value cream and then importing expensive butter brands, such as Lurpak or Anchor.
There is a similar problem in cheese. Imports of fresh, speciality cheeses, mainly from France, were a main reason for the UK's rising trade deficit in 2005.
Early signs suggest this has continued into 2006, with the MDC announcing this week that speciality cheese imports in January and February were some 4,400 tonnes up on the same period in 2005. Imports of cheddar, Britain's iconic and most popular native cheese, were on the rise too.
The MDC said UK cheese exports had also increased recently, but most of this was lower priced curd or cheese for pizza toppings.
The evidence shows Britain's dairy industry has struggled to keep up with other European countries in the shift from commodities to branded products.
MDC stats show Britain produced 17 per cent more butterfat in 2004 than in 1996, compared to a two per cent average drop in production across the then 15 EU member states. UK production of fresh dairy products, meanwhile, only rose three per cent in that period, compared to an EU average increase of 56 per cent.
This over-reliance on commodities has not only opened up the UK's growing added value market to 'foreign' brands, but also left Britain's industry more exposed to EU commodity price cuts by the European Commission, as part of its Common Agricultural Policy reform. The MDC warned this could suppress value across the whole dairy sector.
Britain's biggest dairy processors have worked harder to change the situation over the last year, launching new branded milks, cheeses and spreads.
Most of these have performed well, but not well enough to stop profits falling at two of the country's biggest processors, Dairy Crest and Arla Foods UK.
Both announced last week that business had been hit by soaring input costs, falling milk prices and challenging commodity markets.
Many in the UK dairy industry have been trapped in a vicious circle. They need to invest in innovation to raise value in the sector, but cost pressures make this risky.
Processors should break out of this by collaborating more often on innovation and market research, according to the National Farmers' Union, MDC and UK Department for the Environment, Food and Rural Affairs (DEFRA).
"Little or no opportunity exists for potential investors to try out new technologies without first making huge commitments," said recent joint report by DEFRA and the MDC.
