Farm Ireland

Thursday 20 October 2016

Agri-food trade buffetted by headwinds


Alan Matthews

Published 13/07/2016 | 02:30

Alan Matthews
Alan Matthews

Agri-food exports have been one of the bright spots in the Irish economic recovery since the collapse after 2008. According to Bord Bia, Irish food and drink exports reached a new record of €10.8bn in 2015.

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More significantly, this was an increase of 51pc over the 2009 level, compared to an increase of just 27pc for merchandise exports in general including food. So food exports have been to the fore in helping to drive the recovery.

Around 41pc of Irish food and drink exports go to the UK, with a further 28pc sold to markets that predominantly trade in US dollars.

Only a minority of food and drink exports are sold to other countries in the eurozone. This means that food exports are very exposed to exchange rate volatility.

During 2015, exchange rate movements worked in a favourable direction for agri-food exports.

The euro weakened against sterling in 2015 by 10pc and against the US dollar by 16pc.

Bord Bia estimates that the combined effect of the weakening of the euro against both sterling and the dollar was to add around €950m, or 9pc, to the value of Irish agri-food exports.

The UK referendum on Brexit on June 23 last in which a majority expressed a desire to leave the EU has dramatically changed this situation.

Sterling has fallen sharply. It has lost 15pc in value against the euro since January 1 this year, with 11pc of that loss occurring after June 23. Sterling is now back at a level it was last at in late 2013.

Larger firms will be somewhat protected against this volatility because of hedging, but SMEs are likely to be very exposed.

The Irish food industry can probably deal with sterling at a level of 85p, but should sterling fall further, it would represent a significant threat to competitiveness.

There is some offsetting gain for companies which sell to dollar-denominated markets as the euro has slipped slightly against the dollar since the Brexit referendum.

The euro has weakened by 5pc against the dollar since the beginning of the year, with 3pc of that happening after June 23.

While this will be a small benefit to companies exporting to dollar markets, it also raises the cost of inputs (eg feed) for companies selling mainly on the home market (eg poultry).

Export sales to the UK market will be affected not only by the adverse exchange rate movement, but also by a slower growth in retail sales as consumer sentiment begins to reflect the economic uncertainties which follow the referendum result.

In the longer term, the ability of the food and drinks sector to continue to increase sales to the UK market will be affected by the conditions of access post-Brexit.

What tariff level will the UK choose to apply on agri-food imports? Will the UK enter into free trade agreements with third countries which will give more favourable access to Ireland's competitors?

Will tariffs be reimposed on Irish exports to the UK after the UK leaves the EU?

Ireland's food exporters will want to maintain the closest possible economic links with the UK following the Brexit negotiations.

This will not be easy. Other EU leaders will want to strike a hard bargain with the UK to discourage other member states from following its lead. Why be an EU member if a country can get the same economic benefits while remaining a non-member?

The UK will withdraw from the EU customs union.

It will also, most probably, withdraw from the EU single market.

This will increase the cost of trading across the Irish Sea in both directions, even if tariffs are not re-introduced.

Yet the possibility that tariffs could be reintroduced should not be ruled out.

Brexit involves two sets of negotiations; one set under Article 50 of the Lisbon Treaty to agree the terms of exit, and the other set, under Article 218 of the Lisbon Treaty, to agree a new trade agreement.

These negotiations are distinct and each has its own timeline. Indeed, it may not be possible to formally begin the Article 2018 trade negotiations until the Article 50 negotiations are complete and the UK has left the Union. As the EU Trade Commission put it recently: "First you exit, then you negotiate".

During this period, the UK and the EU would treat each other as third countries.

When exporting to the UK, Irish firms would face whatever tariffs the UK chooses to apply to protect its own farmers.

This would really cause problems for our food and drink exports to the UK.

Alan Matthews is Professor Emeritus of European Agricultural Policy at Trinity College Dublin

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