Agri-food sector faces uncertain future after Brexit

The Irish agri-food industry has been presented with a huge challenge by Brexit. In the very short-term that is manifested in a sharp decline of sterling against the euro.

Longer term it requires some deep thinking about how our food industry positions itself best to avoid the downside of a UK exit from the EU.

Today, if you work in an Irish food company, things are tougher than they were just two weeks ago. In that period sterling has declined by about 10% relative to the euro.

That is a major shift for any currency but is especially sensitive for companies and co-ops that operate with relatively thin profit margins.

Those businesses that produce food in the Republic fit into that category so they are now grappling with depressed revenues in euros for the same volumes produced just a month ago.

Because the UK is our largest export customer, and our nearest geographic customer, the impact is significant.

Food tends to have high volume-to-value ratios, so having a market close to home is important financially.

When that market is suddenly buying everything 10% cheaper it hurts.

The pain is already being felt across the meat industry as beef exports to Britain are large.

Small companies that have built up UK customers will also be exposed as will the dairy sector which continues to ship a lot of cheese and butter, in particular, to the UK market.

For the dairy sector, Brexit just adds to the challenges posed by weak global markets currently so both dairy farmers and processors will have to bear the pressure for some time yet.

These adverse effects are solely related to exchange rates for now. An even greater threat relates to how the UK extricates itself from Europe.

If that goes ahead, and an increasing number of thought leaders in the UK are questioning that possibility, it triggers a wide range of issues for agri- food.

If the UK leaves Europe will it face punitive WTO tariffs on both imports and exports of food?

Will a UK outside of Europe turn to Argentina and New Zealand for cheap food?

If sterling continues to fall will food prices in Britain rise given their net food importing status?

These questions have major consequences for food producers in Ireland and we need the equivalent of a Special Forces team around food to address them.

Amid these challenges there is an interesting dynamic at work among the large Irish food companies.

Despite Brexit the share prices of companies including Glanbia and Kerry has been relatively unaffected.

You might ponder how that is so given the scenario outlined above.

The reason is that these companies have built global businesses that have a much-reduced dependency on food manufactured in Ireland than was the case decades ago.

They have created international businesses in areas outside traditional Irish food processing and in so doing have given their shareholders some protection from the challenges now posed by Brexit.

Key lessons have to be taken from what is unfolding for the Irish agri-food sector.

They include over-dependence on a single market carries systemic risks; building a food business which has product and market diversification helps manage exogenous shocks such as Brexit; efficiency at both farm and factory levels are critical for any industry to thrive amid adversity, and; strong balance sheets are an essential ingredient to navigate periods of crisis in a low margin industry.

I continue to cling to the idea that the really serious thinkers in Britain can engineer a way for that country to avoid triggering Article 50 and starting the formal exit process from Europe.

The stakes are so high, for Britain itself and for its nearest neighbour Ireland, that every stone should be turned before taking that fateful decision.

If they press ahead Ireland must prepare for the exchange rate and market volatility that only started in the past fortnight.

That probably requires consolidation at farm and processor levels, greater investment outside Ireland to provide a hedge against UK turmoil, and a period of low prices for all.

If they find a way to stay in the single market then farmers and food investors, alike, will breathe easier.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.