Justifiably there has been a significant level of concern about Brexit within the Irish agri-food industry. For example, the mushroom sector is particularly exposed to currency volatility and the impacts of Brexit are already being felt. Other sectors such as dairy and beef have a more diversified export portfolio and are somewhat less exposed. The impact of Brexit on Ireland’s evolving Prepared Consumer Foods (PCF) sector merits further consideration. Brexit will undoubtedly challenge the PCF sector but from this challenge, opportunities may arise and Brexit could be a catalyst for innovation and investment in Ireland’s PCF sector.
Exposure to the UK market
Theresa May has announced that she will invoke Article 50 and initiate the UK’s exit from the European Union by the end of March 2017. While the exit process is set to take around two years the decision to leave has already had an impact on the Irish agri-food sector. The UK is, by some considerable margin, Ireland’s largest trading partner. The impact of currency volatility means that exports to the UK decreased from 41% (€4.4bn) of all of food and beverage exports in 2015 to 37% (€4.1bn) in 2016. This means that every one cent increase in the value of the Euro versus Sterling results in a €41m decline in the value of Irish food exports. While the Irish agri-food sector has a significant dependence on the UK market, the dependence is mutual. The UK relies heavily on imported Irish dairy and beef to fulfil its production deficit.
The post quota dairy cushion
For the dairy industry the removal of EU milk quotas in 2015 may have inadvertently prepared the industry for some of the volatility caused by Brexit. In anticipation of a 50% increase in production the dairy industry has invested in new markets and innovative products. Ornua, Ireland’s largest dairy exporter, has recently established facilities in China, the Middle East and North Africa while Kerry Group and Glanbia have undertaken significant M&A activity to expand their international footprints in recent years. The dairy sector will inevitably be affected by Brexit, but the preparatory work for the removal of milk quotas may go some way to softening the blow.
Beefing up an international presence
Ireland exports over 90% of its beef production and the UK is again the biggest market, accounting for 50% of exports. Although the beef industry didn’t experience a step change in regulation like the dairy industry there have been a number of small scale changes that have led to potential new markets for Irish beef.
In 2015 the US market opened its doors to imported Irish beef for the first time in 15 years. The initial agreement which only allowed for the export of high value steak cuts to the US, was extended to cover mince in 2016. The sizeable US burger industry imported over one million tonnes of mince in 2015. The extension of the trade agreement to include mince could see Irish beef producers build upon the 6% export growth to the US they experienced in 2016.
China followed the US in opening the market for Irish beef and although consumption per capita is not as high, China is expected to import 750,000 tonnes by 2023.
Most recently it was announced that market access to Saudi Arabia for minced beef had been secured. Irish agri-food exports to Saudi Arabia have grown by 47% since 2013, the latest agreement offers beef producers the opportunity to capitalise on the emerging demand for high quality Irish products.
Another coup for the Irish beef industry has been the apparent removal of beef from the Mercosur trade deal. Should the EU hold this position it will protect the market from increased imports and competition.
However the industry may feel that the quota limitations of the EU-Canada Comprehensive and Economic Trade Agreement is a missed opportunity for further international expansion. Notwithstanding this perceived missed opportunity, international markets are opening up to Irish beef, providing alternative export opportunities.
The Prepared Consumer Foods Opportunity
The beef and dairy industries have commanded much media attention around Brexit but a more interesting trade dynamic occurs in the Prepared Consumer Foods sector. The PCF sector is significantly dependent on the UK, with 65% of PCF exports destined for the UK. However, unlike beef and dairy where Ireland exports more than 85% of its produce, Ireland’s Prepared Consumer Foods sector has a greater reliance on the domestic market. Interestingly the domestic market has a trade deficit of €796m (up from €700m in 2013) – largely as a result of imports from the UK. The PCF sector accounts for the vast majority of Ireland’s total food and beverage imports from the UK.
There is an opportunity for the PCF sector to create value added products. Ireland is undoubtedly a world leader in food production. Two-thirds of the land is dedicated to agriculture. In spite of this agricultural expertise there are very few international reaching Irish food brands of scale, with the exception of Kerrygold. For many years Ireland has been exporting top quality ingredients to the UK (and other markets) for those ingredients to undergo further processing and be imported back to Ireland (or exported further afield) as value added consumer foods.
Brexit may force the Irish food sector to indigenise the entire value chain. Instead of exporting top quality ingredients and importing prepared consumer foods there is an opportunity to shift secondary processing to Ireland. Whereby Irish producers would sell to (or vertically integrate with) Irish processors who would add value through innovation, brand development and marketing. As a nation Ireland would continue to export the majority of its agricultural produce, but such exports would be prepared consumer foods instead of raw material ingredients.
Through tailored marketing and business development Kerrygold has established itself as a premium branded butter in markets such as Germany, the US and South Africa. At the time Kerrygold was launched in 1962 it took significant time and resources to fully understand market dynamics and consumer preferences. Today the PCF sector can leverage resources like Bord Bia’s recently launched Centre for Consumer Insights and Origin Green or Enterprise Ireland’s Export Assistance Programme to develop and market brands that meet consumer needs.
A Keynesian approach to Brexit
Taking a very simplistic view, Keynesian economics advocates that one should spend their way out of recession. At a time when some observers are calling on Ireland’s largest food companies to divest of their consumer foods divisions, Keynes theory may be relevant, as fears grow about the impact of Brexit on the Irish agri-food sector. Instead of divesting of consumer foods divisions now may be the time for the Irish agri-food sector to invest significantly in new product and new brand development in order to create a premium, value added industry. The current uncertainty surrounding Brexit creates an opportunity to revolutionise the Irish food industry. The industry can transition from a high quality raw material supplier into a global powerhouse for food and beverage brands.
Grant Thornton’s dedicated Agri-food team has a wealth of national and international experience in the agri-food sector. They provide bespoke professional services to companies of all sizes across the entire food supply chain. This approach has resulted in a deep understanding of the intricate interdependencies that exist within the industry. For more information on Grant Thornton’s agri-food services see here.