We have entered a period of turbulence and uncertainty and we will just have to learn to live with it, according to Aidan Cotter(below), CEO of Bord Bia, as he opened a Brexit seminar for Irish agribusinesses held in London.
We are living in anticipation – neither Trump nor Brexit has actually happened yet. Nobody has the answers, which reduces confidence, creates uncertainty, slows investments and is bad for business.
The key question for most agri-food business attendees was how to operate and grow in this uncertain environment. Many felt it was head down, meet the quarterly sales targets, close out currency positions and let the noise carry on in the background.
This is easier said than done. Agri-food between Ireland and the UK is highly integrated. For example, every year 750m litres of milk moves from the North to the South.
Integrated trade
The UK is our single biggest market for food and drink, buying €4.4bn off us annually. It is critical to every sector, accounting for 54% of our meat and livestock, 30% of our dairy, 70% of our prepared food and 90% of our horticulture.
But Ireland also imports more food and drink from the UK than its next two markets combined: France and the Netherlands.
As one speaker said, the milk in Baileys can go over a border five times before it makes it into the bottle, this makes Ireland and Brexit one of the most difficult issues to solve.
The prospect of a soft Brexit looks increasingly likely. The UK only voted to leave the EU, and it will need to maintain a close relationship with the EU at the end of it.
April fools: nobody has a clue
Worryingly, there seems to be no plan, with no certainty about what the quality of the outcome will be. It now looks like a transition period (up to five years) is inevitable and desirable.
“Hardly anyone in Government has a really pin-sharp picture of how this process will play out,” according
to Ian Wright, director general of the Food and Drink Federation in the UK.
He said: “This is common when a country goes to war, but it is unprecedented in peace times.” He added the fact that the date when the UK is officially out of Europe will be 1 April 2019 is symbolic in itself!
Hard hats or hair nets
One thing that looks more certain is stricter control on immigration. This will be difficult on the UK food industry, as 120,000 of the total 400,000 employees are non-Irish and non-UK Europeans. If labour is scarce, costs will rise.
Furthermore, food manufacturing jobs are incorrectly seen as low skill and will lose out to pharma and finance, where “ministers prefer to do photocalls with hard hats
than hair nets”, according to Wright.
Falling food prices
Food prices in the UK have fallen for the past 27 consecutive months. This has been driven by the rise of the German discounters.
Although they are still pretty small (11% share of the UK grocery market), they are big enough to be important and influential.
A recent survey showed that 76% of shoppers believe that food and drink will get more expensive next year.
Brexit adds complexity to the grocery sector – but it isn’t the cause of the problem, according to James Walton, chief economist IGD.
He maintains that Brexit is a manifestation of a frustration with globalisation.
“This is the end of a historical cycle. Between 1950 and 2000, business conditions for groceries in Europe were benign,” says Walton.
He adds that all supermarkets did very well, with lots of innovation (barcodes), access to a larger market (EU), mass car ownership, a post-war baby boom, along with mass market advertising through TV. So there is a cohort of senior management who have lived with nothing else and now don’t know how to deal with the current environment and millennials.
What recession?
The UK has managed to avoid recession since the referendum and it is now pointing to growth of 0.5%, according to Paul Hollingswoth, economist with Capital Economics.
Pre-Brexit growth was expected to be 2.7% and, despite a weakened initial forecast, the Government is now predicting 1.4% growth in 2017.
Households have shrugged off Brexit so far and continue to spend. Sentiment is strong, as household incomes are going up in real terms. So consumer confidence has held up better than expected.
No doubt the expanded QE programme, a reduction in interest rates which were passed on and the falling pound driving up equity prices have all helped.
However, the key indicator to watch will be inflation. It looks like there will be a sharp increase in prices, mainly due to the depreciation of sterling.
He sees inflation peaking at 3% in 2018, and if firms pass on all the rise in costs this could see the inflation tip 4%. However, if firms absorb some of it, it may only rise 2%.
The longer term looks more unpredictable, with a squeeze likely on real wages, slowing employment growth and slower growth in disposable household incomes.
UK sails into the sun
So the UK is leaving the EU and is moving itself to a latitude much closer to the equator, where the sun always shines. Such is the overwhelmingly optimistic mood in the UK right now.
But while consumer sentiment has rebounded, the UK is still in a honeymoon period of patriotism, the real test will be in two years’ time.
No doubt this will force the EU to change. But how it changes depends on elections in each country in the coming months.
Finally, nobody knows how this is going to play out. Anyone who says they do is simply lying.
Volatility
In times of volatility, businesses are told to minimise risk. However, ironically, politicians’ posturing is creating more risk for businesses. Meanwhile, the businesses are holding their breath.
With every political speech affecting currencies, volatility is the biggest short-term challenge. For example, in the past month alone, sterling has fluctuated between 0.83p and almost 0.91p.
But Brexit is not about a weak pound. While the exchange rate is enjoying a bit of a Trump bang at the moment, the huge wild card may be the sustainability of the euro itself.
This is going to test the zeal of every agribusiness leader and management team and only those willing to adapt will survive. While investment in automation will continue, food manufacturers will need to take out more cost and improve quality, while moving away from commodities. This will only lead to further consolidation in food processing.
Listen to Jon Copestake of the Economist Intelligence Unit on the effect of Brexit on retail food prices in the UK in our podcast below:
Listen to "Brexit and food prices" on Spreaker.
The “experts” (analysts, economists, politicians)
in the UK believe there is no risk to leaving the EU
or that food prices will go up. The silence surrounding rising food prices would appear to be political and is simply a negotiation tactic. The overall UK trade deficit in food and drink remains stubbornly high. Will Brexit help the UK close its food and drink trade gap? At £21bn, the trade deficit exceeds the entire £18bn value of food and drink exports. For Brexit to be deemed an economic success, it will require at least a narrowing of this deficit. Will food and drink be prioritised in the UK’s trade negotiations or will it be used as a bargaining chip to secure deals for other sectors, such as finance and automotive?Given that the UK imports 40% of its food, coupled with a weaker pound and inevitably as current contracts work out, food prices will move up. While this may seem like a positive, it will negatively affect demand and volumes, and as we have seen before, consumers are very sensitive to price increases. How patriotic will tomorrow’s consumers be in their food choices? The politicians may say British people will buy more British, but this has had many goes and doesn’t gain a lot of traction. If tariffs are imposed in the future, it is important to understand that they are not exactly taxes on an exporting country. While the exporting country or exporting company pays the tariff, it passes this cost on in the price on the product. The top retailers will not take a step back in food safety standards. These are just going to increase, as they have been doing. This puts third-country imports in a precarious position. The UK government is going to find it difficult to combat rising food prices. It seems very unlikely that it will be able to conclude a trade deal with South America or the US while at the same time trying to negotiate a deal with its most important trading partner: the EU. This is before considering the skillset or people required. Read more
Colm McCarthy: Does Brexit have a silver lining?
Full coverage: Brexit
We have entered a period of turbulence and uncertainty and we will just have to learn to live with it, according to Aidan Cotter(below), CEO of Bord Bia, as he opened a Brexit seminar for Irish agribusinesses held in London.
We are living in anticipation – neither Trump nor Brexit has actually happened yet. Nobody has the answers, which reduces confidence, creates uncertainty, slows investments and is bad for business.
The key question for most agri-food business attendees was how to operate and grow in this uncertain environment. Many felt it was head down, meet the quarterly sales targets, close out currency positions and let the noise carry on in the background.
This is easier said than done. Agri-food between Ireland and the UK is highly integrated. For example, every year 750m litres of milk moves from the North to the South.
Integrated trade
The UK is our single biggest market for food and drink, buying €4.4bn off us annually. It is critical to every sector, accounting for 54% of our meat and livestock, 30% of our dairy, 70% of our prepared food and 90% of our horticulture.
But Ireland also imports more food and drink from the UK than its next two markets combined: France and the Netherlands.
As one speaker said, the milk in Baileys can go over a border five times before it makes it into the bottle, this makes Ireland and Brexit one of the most difficult issues to solve.
The prospect of a soft Brexit looks increasingly likely. The UK only voted to leave the EU, and it will need to maintain a close relationship with the EU at the end of it.
April fools: nobody has a clue
Worryingly, there seems to be no plan, with no certainty about what the quality of the outcome will be. It now looks like a transition period (up to five years) is inevitable and desirable.
“Hardly anyone in Government has a really pin-sharp picture of how this process will play out,” according
to Ian Wright, director general of the Food and Drink Federation in the UK.
He said: “This is common when a country goes to war, but it is unprecedented in peace times.” He added the fact that the date when the UK is officially out of Europe will be 1 April 2019 is symbolic in itself!
Hard hats or hair nets
One thing that looks more certain is stricter control on immigration. This will be difficult on the UK food industry, as 120,000 of the total 400,000 employees are non-Irish and non-UK Europeans. If labour is scarce, costs will rise.
Furthermore, food manufacturing jobs are incorrectly seen as low skill and will lose out to pharma and finance, where “ministers prefer to do photocalls with hard hats
than hair nets”, according to Wright.
Falling food prices
Food prices in the UK have fallen for the past 27 consecutive months. This has been driven by the rise of the German discounters.
Although they are still pretty small (11% share of the UK grocery market), they are big enough to be important and influential.
A recent survey showed that 76% of shoppers believe that food and drink will get more expensive next year.
Brexit adds complexity to the grocery sector – but it isn’t the cause of the problem, according to James Walton, chief economist IGD.
He maintains that Brexit is a manifestation of a frustration with globalisation.
“This is the end of a historical cycle. Between 1950 and 2000, business conditions for groceries in Europe were benign,” says Walton.
He adds that all supermarkets did very well, with lots of innovation (barcodes), access to a larger market (EU), mass car ownership, a post-war baby boom, along with mass market advertising through TV. So there is a cohort of senior management who have lived with nothing else and now don’t know how to deal with the current environment and millennials.
What recession?
The UK has managed to avoid recession since the referendum and it is now pointing to growth of 0.5%, according to Paul Hollingswoth, economist with Capital Economics.
Pre-Brexit growth was expected to be 2.7% and, despite a weakened initial forecast, the Government is now predicting 1.4% growth in 2017.
Households have shrugged off Brexit so far and continue to spend. Sentiment is strong, as household incomes are going up in real terms. So consumer confidence has held up better than expected.
No doubt the expanded QE programme, a reduction in interest rates which were passed on and the falling pound driving up equity prices have all helped.
However, the key indicator to watch will be inflation. It looks like there will be a sharp increase in prices, mainly due to the depreciation of sterling.
He sees inflation peaking at 3% in 2018, and if firms pass on all the rise in costs this could see the inflation tip 4%. However, if firms absorb some of it, it may only rise 2%.
The longer term looks more unpredictable, with a squeeze likely on real wages, slowing employment growth and slower growth in disposable household incomes.
UK sails into the sun
So the UK is leaving the EU and is moving itself to a latitude much closer to the equator, where the sun always shines. Such is the overwhelmingly optimistic mood in the UK right now.
But while consumer sentiment has rebounded, the UK is still in a honeymoon period of patriotism, the real test will be in two years’ time.
No doubt this will force the EU to change. But how it changes depends on elections in each country in the coming months.
Finally, nobody knows how this is going to play out. Anyone who says they do is simply lying.
Volatility
In times of volatility, businesses are told to minimise risk. However, ironically, politicians’ posturing is creating more risk for businesses. Meanwhile, the businesses are holding their breath.
With every political speech affecting currencies, volatility is the biggest short-term challenge. For example, in the past month alone, sterling has fluctuated between 0.83p and almost 0.91p.
But Brexit is not about a weak pound. While the exchange rate is enjoying a bit of a Trump bang at the moment, the huge wild card may be the sustainability of the euro itself.
This is going to test the zeal of every agribusiness leader and management team and only those willing to adapt will survive. While investment in automation will continue, food manufacturers will need to take out more cost and improve quality, while moving away from commodities. This will only lead to further consolidation in food processing.
Listen to Jon Copestake of the Economist Intelligence Unit on the effect of Brexit on retail food prices in the UK in our podcast below:
Listen to "Brexit and food prices" on Spreaker.
The “experts” (analysts, economists, politicians)
in the UK believe there is no risk to leaving the EU
or that food prices will go up. The silence surrounding rising food prices would appear to be political and is simply a negotiation tactic. The overall UK trade deficit in food and drink remains stubbornly high. Will Brexit help the UK close its food and drink trade gap? At £21bn, the trade deficit exceeds the entire £18bn value of food and drink exports. For Brexit to be deemed an economic success, it will require at least a narrowing of this deficit. Will food and drink be prioritised in the UK’s trade negotiations or will it be used as a bargaining chip to secure deals for other sectors, such as finance and automotive?Given that the UK imports 40% of its food, coupled with a weaker pound and inevitably as current contracts work out, food prices will move up. While this may seem like a positive, it will negatively affect demand and volumes, and as we have seen before, consumers are very sensitive to price increases. How patriotic will tomorrow’s consumers be in their food choices? The politicians may say British people will buy more British, but this has had many goes and doesn’t gain a lot of traction. If tariffs are imposed in the future, it is important to understand that they are not exactly taxes on an exporting country. While the exporting country or exporting company pays the tariff, it passes this cost on in the price on the product. The top retailers will not take a step back in food safety standards. These are just going to increase, as they have been doing. This puts third-country imports in a precarious position. The UK government is going to find it difficult to combat rising food prices. It seems very unlikely that it will be able to conclude a trade deal with South America or the US while at the same time trying to negotiate a deal with its most important trading partner: the EU. This is before considering the skillset or people required. Read more
Colm McCarthy: Does Brexit have a silver lining?
Full coverage: Brexit
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