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The potential for GB-European trade in liquid milk

Report for Defra, September 2007

Our research suggests that the UK (British) raw milk market is relatively well integrated with other EU Member States, despite the fact that there is relatively little trade in liquid milk.

That said, UK competition authorities are still likely to considor the liquid milk market to be Great Britain at its widest given that limited imports take place. But each competition inquiry will review the issues on their own merits.

There is no evidence to suggest that the liquid milk market in Great Britain (i.e. England , Scotland and Wales) is essentially isolated from the market in the rest of Europe, despite the comparatively low volume of trade in liquid milk between GB and the rest of the EU. This is the conclusion of the latest research into the dynamics of the GB liquid milk market conducted on behalf of the UK Department of the Environment, Food and Rural Affairs (Defra) by Agra CEAS Consulting.

One of the study aims was to establish whether the GB liquid milk market should be treated as an isolated and insulated market for the purposes of any enquiry into activities on that market by competition authorities. Our research found that there is clear statistical evidence that the UK (British) raw milk market is relatively well integrated with other EU Member States, despite the fact that there is relatively little trade in liquid milk, although each competition inquiry will review the issues on their own merits.

The full report can be downloaded at: http://www.defra.gov.uk/foodrin/milk/documents/gb-eu-trade-liquidmilk.pdf

Background to study

Following the formation of the Single European Market in 1992, all duties, tariffs and quotas on trade within the Community were abolished. This resulted in the elimination of significant cost increasing formal intra-EU barriers to trade, facilitating the free movement of capital, labour, goods and services between Member States; transaction costs (i.e. transport and marketing costs) associated with intra-EU trade were reduced thereby increasing the possibility of exploiting arbitrage opportunities in the EU.

It would therefore have been expected that in the light of the introduction of the Single European Market and the implementation of common EC rules on milk hygiene in 1994, intra-EU trade in liquid milk, as in other product areas, would have been encouraged. In practice, however, even though there has subsequently been some growth in intra-EU trade of liquid milk (particularly long-life milk) between other EU Member States, trade between the United Kingdom and mainland Europe (and between Great Britain and Ireland ) has been minimal, suggesting that significant barriers or impediments to trade still exist. Consequently, the liquid milk market in Great Britain tends to be regarded as national at its widest.

Report findings

The relatively low level of trade was found to be more due to cross-Channel transportation costs and varying patterns of liquid milk consumption between GB and the rest of the EU than to any more serious barriers to trade. This is because liquid milk is typically a bulky, perishable and low-value product.

For raw liquid milk, transported in tankers, transport costs for milk exported from GB range from 1.7ppl to France to 4.9ppl to Denmark . The cost of transport to Belgium , the Netherlands and Ireland was similar, ranging from 3.0ppl to 3.5ppl.
The costs of transporting packaged milk are significantly higher, ranging from 5.1ppl to France to 14.5ppl to Denmark .

Imports of liquid milk to the GB market are also hindered by both the British consumer's taste for fresh milk with a shorter shelf-life (rather than UHT milk which is more prevalent in much of the rest of the EU), and a growing trend towards local or regional sourcing of such products.

Nevertheless, there is some cross-border trade in liquid milk. Historically, raw milk exports from GB have tended to occur as a balancing activity during periods of excess milk supply relative to processing capacity, although these have rarely been economically sustainable. There is however a demand for organic liquid milk in GB which cannot currently be met by domestic supply, and that organic raw milk imports during 2006/07 will have reached 7 million litres (2% of UK raw organic milk production), rising to 20 million litres in 2007/08 (5% of UK raw organic milk production). Moreover, new improvements in processing technology, particularly the introduction of filtered extended shelf-life fresh milks has opened up new export markets for GB milk, notably among British expatriot communities in countries like Spain and Malta .

The study was aimed in particular at establishing whether the GB liquid milk market should be treated as an isolated and insulated market for the purposes of any enquiry into activities on that market by competition authorities. Econometric analysis found clear statistical evidence that the UK (British) raw milk market is relatively well integrated with other EU Member States, despite the fact that there is relatively little trade in liquid milk. That said, each competition inquiry will review the issues on their own merits.

The Office of Fair Trading has responded to the report findings suggesting that the issue of imports into Great Britain may be more relevant than the issue of exports from Great Britain when considering the effect of a merger. This would suggest that the definition of the fresh liquid milk market, as applied by competition authorities when assessing horizontal mergers within the industry, is likely to remain as national at its widest, at least in the short to medium term. The report findings suggest that although there is evidence that fresh milk is being imported into Great Britain , volumes remain limited and the increasing importance placed on provenance would tend to limit the degree to which imports form credible substitutes.