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Brexit bites - Food industry focus

business-articlesBrexit bites - Food industry focus
Since the EU referendum way back in 2016, there has been much discussion about Brexit’s potential impact on the UK food and drink industry.

Now, as the UK prepares to finally leave the EU, we explore what this historic exit means for businesses in this hugely significant sector.  

Trade with the EU

The EU currently accounts for roughly 70% of the UK’s food and non-alcoholic drinks imports, facilitated by the free flow of goods.

Tariff-free trade will remain in place once the UK officially leaves the EU on 31st January, but only through the transition period agreed to by both parties.

Once this transition period comes to an end in December 2020 the UK’s future trade relationship will be based on any deal struck between the UK government and the EU in the interim.

Dominic Goudie, the head of international trade at the Food and Drink Federation (FDF) has urged Boris Johnson to seek a deal which will help to keep goods flowing freely:
‘Government will need to deliver a comprehensive deal with the EU which minimises costly non-tariff barriers by ensuring dynamic regulatory equivalence and delivering a level playing field in terms of labour laws, animal welfare and environmental protections.’
However, Goudie suggests this may be a difficult task to achieve in the short time frame in which Johnson has given himself.

‘Delivering such a comprehensive agreement before the end of 2020 appears extremely challenging given typical EU trade negotiation timescales.’

If the UK and EU prove unable to reach a deal by the end of 2020 the UK faces the prospect of a highly disruptive no-deal Brexit.

This will see the UK default to WTO terms for trade, which could see tariffs ranging from 12% for fruit and vegetables to 51% for dairy and eggs, a cost which will inevitably be passed on to consumers and absorbed by businesses.  

The food industry is also particularly vulnerable to the potential disruption of Brexit on supply lines. 

In the event of a no-deal Brexit, food and drink moving between the UK and EU will be subject to more stringent checks, likely leading to major delays in Dover and Calais, which has sparked fears of empty shelves in supermarkets.

The FDF’s chief operating officer Tim Rycroft predicts that a no-deal Brexit would result in ‘selective shortages’ of food which could go on for ‘weeks or months’.

The threat of shortages is likely to cause business to stockpile materials at significant cost.

In the run up to the 31st October Brexit deadline last year, Domino's Pizza Group reportedly spent £7m stockpiling ingredients amid fears a no-deal Brexit could disrupt supplies.

Divergence in regulation

Another major headache for the UK’s food and drink industry post-Brexit will be the possible divergence in the regulatory landscape between the UK and EU.

After Brexit any food exported to the EU will still need to meet strict EU guidelines, but the UK could choose to relax domestic regulations to help win trade deals with other countries.

There is considerable speculation that the UK government may allow the importing of chlorine-washed chicken and hormone-treated beef as part of a trade deal with the US, despite the UK environment secretary Theresa Villiers promising this will not be the case.

This could leave UK food and drink manufacturers with two choices:

Either retain access to the EU by abiding by its regulations, but potentially struggle to compete domestically against cheaper imports, or lower standards to stay competitive in the UK, but lose access to the European market.

The UK already has plans to shift away from the EU’s common agricultural policy, with the introduction of an agricultural bill which looks to be the biggest shake up of the UK’s farming industry in 40 years.

Villiers claims the new bill ‘will transform British farming’ and ‘move away from the EU’s bureaucratic common agricultural policy and towards a fairer system which rewards our hard-working farmers for delivering public goods’.

Boris Johnson has committed to maintain subsidies at the same rate as the EU –worth about £3bn a year – through the duration of the current government, but will alter the way they are divided up, potentially leaving some farmers worse off than in the current system.

Labour shortages

The UK’s agri-food sector relies heavily on EU workers for both seasonal and permanent labour and the loss of freedom of movement could see the industry shorthanded post-Brexit.

According to the food and drink federation’s Q3 2019 Business Confidence Report, the UK food and drink industry is expected to need another 140,000 recruits by 2024 to meet the needs of an estimated UK population of 69 million.

EU migrants make up around a third of the 450,000 strong workforce of the food manufacturing sector, the highest of any sector in the UK, and make up roughly 12% of the 4 million working through the entirety of the UK food chain.

With domestic unemployment at its lowest rates in over 40 years, the loss of a significant portion of its workforce could see wage costs spiral as the industry struggles to attract workers.

The farming sector is thought to be particularly vulnerable to the losses of EU works as the easy access to flexible and cheap migrant labour has limited investment in productivity.

In a letter to then Prime Minister Theresa May in 2016, the National Farmers' Union (NFU) urged the government to maintain freedom of movement as it was ‘vital’ to the farming industry.

‘Access to [EU] labour is essential as it underpins the UK food chain's timely delivery of high quality affordable food to consumers.’

Farmers fear that without EU workers their produce could be left to rot in the fields as they struggle to secure enough labour, with 98% of seasonal workers originating from the EU.

Weakened GBP exchange rates

The UK’s exit from the EU is also expected to put pressure on GBP exchange rates as the uncertainty of the UK’s path outside of the union weighs on Sterling sentiment.

The falling value of the pound will prove another challenge for the UK’s food and drinks industry.

The UK is a net importer across most food commodities, so a lower GBP exchange rate would likely increase material costs for food manufacturers in the UK.

Switching to a local supplier may not necessarily mitigate this issue either as increased demand for these goods will quickly raise prices.

There may also be limited scope for substitution, with many popular foods such as avocado being almost entirely imported from outside the UK.

A fall in the value of the pound may require businesses to implement some cost-cutting measures in order to remain profitable, such as sourcing different ingredients, weight decreases or even dropping products which are underperforming.

However, firms can also mitigate some of these risks by hedging against a weaker pound with the support of a leading currency provider like Currencies Direct.

For those food and drink businesses who focus on exports, a weaker pound may prove beneficial, as it makes UK products more attractive to overseas buyers.

Suppressed GBP exchange rates could also help to boost foreign investment in the UK, particularly once the Brexit uncertainty begins to clear.
While the path forward is murky at the moment, it looks like Brexit is set to take a bite out of the food and drink industry in the short term. The UK’s exit from the EU could also throw up challenges which may take years to overcome.

Understanding the risks and planning for all the potential ramifications will remain of paramount importance for businesses as 2020 progresses.
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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