With Rabobank predicting that Brexit will affect investment levels and cost UK agriculture and food companies across the supply chain, we ask senior consumer foods analyst John David Roeg what the implications of various deals with the European Union could be, and how different food and agribusinesses could react.
What are the implications of the uncertainty that has rocked the UK?
For the time being it is producers and, especially, retailers that are impacted by competition and input inflation. It is probably going to stay [as it is] for now, unless there is more pressure on producers to raise prices because of the weakening pound. That would mean importing inflation.
Nobody expected this in Europe. As long as there is uncertainty, companies will delay decisions. That is what happened at the start of the financial crisis in 2008. Then there were a series of opposing policies that meant more uncertainty, with borrowing and then austerity. [The global financial crisis] has taken a very long time to pan out, with consumption only up again in the last two years or so. If this kind of uncertainty is ongoing, people will reduce spending and delay large purchases, hurting the economy even more.
What are some of the different options for trade deals with the EU?
One is to be in a similar position to Norway, a member of the European Economic Area, which is the best possible outcome. They have free movement of people but still some trade barriers and separate agreements on agricultural products. That means no quotas [for Norway], but there have also been anti-dumping issues with Norwegian salmon in the past getting into the EU.
Then you have agreements such as the one with Switzerland, and the option of no agreement. In that case the cost of imports and food from trade tariffs could go up by at least 3 to 3.5 percent. The British will continue to eat bacon, but it might become a bit more expensive.
What will happen when there is more certainty?
Shifts in trade flows are hard to predict. If the EU decides one day that all bacon should be produced organically, for example, then we can only export organic products which would have implications for UK consumption and sales. You cannot predict what is going to happen, or what the EU will do in future that could impact UK agriculture.
Companies will start to relocate operations if possible. It need not all be negative. Some might even relocate from the continent to the UK to produce more locally. Farmers will probably lose out on subsidies and will need to be having that conversation with the UK government. There will probably be a need for more self-sufficiency, … [which] will take a long time to materialise. But if you are a farmer, are you going to start working towards that now or wait and see what will happen? That’s uncertain.
How do you think different companies along the supply chain will react?
For multinationals with corporations everywhere, [Brexit] probably won’t change a lot of things. Perhaps some investments will be relocated. If you are a UK-based company and you were planning to invest somewhere on the continent, you also might reconsider and invest somewhere in the UK to avoid import duties and whatever restrictions come up in the future.
If the pound weakens, it could make sense to source more locally from private label producers if much of the added value comes with production and not input costs. It is all company-specific. It can go both ways, but the balance will not be positive.