The prospect of the UK not reaching a deal on its departure from the EU has risen in recent weeks, amid tight votes at Westminster and Brussels, expressing opposition to UK prime minister, Theresa May’s latest proposals on customs.
The Irish food industry has been watching politicians battle it out for the past two years. There has been no resolution or concrete proposal. But with seven months to go until the UK is to leave the EU and with warning commentary from Bank of England governor, Mark Carney, a no-deal exit is increasingly likely, and so executives in the agri-food industry are accelerating their damage-limitation plans.
The purchase of the UK’s 2 Sisters food group by the Meath-based Kepak group is a typical example of the industry’s proactivity in ensuring that whatever the outcome of the negotiations between Theresa May’s government and Michel Barnier’s EU, they will maintain their market share in Britain.
Kepak’s acquisition gives it a further five facilities across the UK: three sites in Cornwall, in south-west England, as well as one in southern Wales and another in the north-east of Scotland. Kepak described the deal as a “strategic growth acquisition”. It said the move would be a hedge against Brexit and currency fluctuations, and would support its “meat-based, value-added business”.
This is typical of the strategic decisions being taken by Ireland’s major food businesses to ensure they maintain their UK retail, food-service, and manufacturing relationships.
Others in the meat sector are doing similar. In June, the Larry Goodman-owned ABP Food Group announced €19m for the planned redevelopment of its Perth processing plant, in Scotland.
Last year, Dawn Meats entered into a strategic partnership with rival, Dunbia, which will see the establishment of a joint venture in the UK, comprising the UK operations of both organisations. Dunbia’s considerable presence in the UK — it has two large plants in the North and seven in Britain — provides Waterford-based Dawn with a Brexit buffer, as well as cementing its UK supply chain.
These diversifications give hedging options against the anticipated, high-frequency currency fluctuations, as the Brexit process works its way through the economy. Of course, it also provides useful options to arrange suitable “transfer pricing” between supplies of meat from farmers and abattoirs in Ireland and their wholesale outlets in the UK, to militate against the anticipated, 40% customs tariff, if the World Trade Organisation fall-back occurs.
To give an extreme example, Irish companies with subsidiaries in the UK can opt to sell a €200 side of beef by means of a transfer pricing arrangement to their UK subsidiary for, say, €20.
In the process, they are paying 40% import tariff into the UK on €20, as opposed to paying the high tariff on the open market price of €200. There is additional benefit, in that the higher profits are declared in the Irish-based company attracting the 12.5% corporation tax, rather than the higher rate, if declared by the UK subsidiary.
The enormity of the unique exposure of the meat industry to Brexit can be gauged from the Bord Bia report that some 50% of all Irish beef exports went to the UK last year, valued at €1.25bn. The critical importance of the market continues to be reflected in the export figures for the five months to May, when Irish beef exports accounted for 70% of the UK’s total beef imports.
The interconnectedness of the agri-food industry, across the UK and Ireland, is even more evident in the dairy sector, where Glanbia, Ornua, Lakeland Dairies, Dairygold and the rest of Ireland’s dairy industry, dominate the British market.
Glanbia’s UK division, Glanbia Cheese, with headquarters in Cheshire, is the outstanding example. It is the largest mozzarella manufacturer in Europe. Glanbia Nutritionals also has a manufacturing facility in Middlesbrough. It sources its milk across the island of Ireland, but also across England, Scotland, and Wales. Disruption — soft or hard — to the complex supply chains to feed these plants will be a “sobering challenge”, says Jim Bergin, chief executive of Glanbia Ireland, who warned that the effects of Brexit could turn into a “crisis situation”.
Like many in the industry, he recognises that even if agreement is reached on the UK Chequers proposals, they will no longer be an EU member state, after withdrawal on March 29 next year, and will no longer enjoy the same benefits as all other members.
Import tariffs on dairy and cheese, of up to 50%, could apply to Irish exports to the market in a worst-case scenario, but considerable delays along the supply chain, to comply with EU regulations at border crossings, will be a minimum that can be expected.
Some businesses, such as Dairygold, which ships the bulk of its cheddar cheese to the UK, are hedging against the possibility of increased trade friction, by looking further afield.
Dairygold plans to shift production from making cheddar destined for British consumers to cheese popular in other markets, such as North America, Australia, and the rest of the EU. The Irish firm has teamed up with Tine, Norway’s largest farmer-owned dairy co-operative, to build a new plant in Mogeely, in Cork, capable of processing 20,000 tons of Jarlsberg, a cheese very popular in the US market.
Michel Barnier, the EU’s chief Brexit negotiator, referring to the latest difficulty in getting agreement with the UK in time for an orderly exit from the EU — and with particular reference to the private sector — stated that “everyone must now step up preparations for all scenarios and take responsibility for their specific situation.”
In other words:
Executives at some of Ireland’s largest dairy companies paint a familiar picture, planning to get around the border issues by acquiring processing plants in the UK or diversifying into new markets.
However, there is no panacea for Ireland’s exposure to the British market, should Brexit trade talks go sour.
Up to 65% of Ireland’s cheddar cheese exports go to the UK, along with large shipments of butter and infant formula. In total, 30% of Ireland’s dairy production is sold to the UK.
With this level of exposure, despite the best planning and strategising, there will be damage to the industry, unless the UK stays within the EU’s single market or gets an equivalent deal to match.
Most at risk are the farmers who are dependent on the processing plants to find new markets, or ways around the cross-border tariffs and customs paperwork.
Agriculture Minister, Michael Creed, may have to take a leaf out of US president, Donald Trump’s book, which recently supported US farmers hit by the Chinese import tariffs on agri-food products with $12bn in aid. Now must be the time for Minister Creed to lobby for the setting-up of an EU Brexit support fund for the agri-food sector for those countries most exposed, such as Ireland.
John Whelan is an expert and consultant on Irish and international trade