SPECIAL REPORT: Food Businesses Left “Devastated” by Fall in Sterling but Could Agrochemical Industry Benefit from Brexit?

21 Nov 2016 --- Britain's decision to exit the EU has left some UK food businesses financially “devastated” while experts warn of a destabilizing future ahead but Brexit could present opportunities for the agrochemical giants. Nearly six months since the UK voted to leave the EU, the food industry has had time to digest the implications of a post-Brexit world and what it means for their businesses.

In one ear, the food industry is hearing the sound of the UK government trumpeting the post-Brexit world and how it will successfully target non-EU markets in a bid to increase British food and drink exports by $3.6bn by 2020.

Andrea Leadsom, the new secretary of state for Environment, Food and Rural Affairs (Defra) said: “Our food and drink is renowned for having the very best standards of animal welfare, quality and safety and I want even more of the world to enjoy what we have to offer.”

But in the other ear, ringing loud are concerns about the plunge in value of sterling, uncertainty as to the type of Brexit deal the government will strike, and confusion about the makeup of future trade deals.

What the food industry most seeks is clarity about the direction of travel and the prime minister Theresa May is not playing ball.

Professor Tim Lang, food policy expert at London’s City university, told FoodIngredientsFirst: “The restructuring of the British food system that will happen very fast after the Brexit process is frankly destabilization.”

Sterling leads to retail price rises
In the past few days, the boss of Premier Foods Gavin Darby took a swipe at the likes of Unilever and its other international rivals (which have been impacted in the fall in value of sterling compared to the dollar and euro) and said that its business has been shielded from the effects of Brexit.

Darby said: “Premier has the advantage over our competitors of dealing mainly in pounds, while many of our competitors are counting in euros and dollars”, pointing out that around 95 percent of its products are produced in the UK using local ingredients and suppliers.

The impact of the fall in value in sterling against the US dollar and euro has already led to a high profile dispute between Tesco and its supplier Unilever, as well as warnings of price rises across a number of well-known brands from PepsiCo-owned Walkers to Birds Eye to Typhoo Tea.

PepsiCo is seeking a price increase per packet of its crisps, blaming the weak pound pushing up the cost of oil and other ingredients; fish-finger maker Birds Eye is looking at price rises and reducing the number of products in packs to help manage its costs since Brexit; last month Typhoo said the cost for importing tea had upped by 50 percent (the cost of an 80kg bag of tea has risen from £100 ($124) to £150 ($186) and that it was talking to supermarkets about price rises.

Meanwhile the wine industry trade body, the WSTA, said it expected average price increases of around 29p (36 cents) per bottle should the pound stay at its current level.

And while Premier Foods might have escaped taking a hit through currency fluctuations, the Mr Kipling maker can’t escape the rising cost of ingredients and has also spoken to retailers about price rises, on the back of steep rises in edible oils, butter and wheat.

Impact on food businesses
While multinational retailers and food companies can largely weather currency fluctuations without too much difficulty, the same can't be said for smaller businesses. 

Jonathan Newman is the chief executive of coconut water maker Chi, a London-headquartered business which has annual revenues of around £3m ($3.7m) a year and employs just five people.

Newman told FoodIngredientsFirst that sterling's crash has had a “devastating impact” on his business.

“Unfortunately, we are not a Unilever” says Newman, who said the cost of buying raw materials - which the company buys in Thailand in US dollars - has risen by thousands and thousands of dollars. 

“For such a small company it has had a devastating impact. This kind of thing can put some businesses out of business,” he said.

Luckily, Newman's suppliers have to an extent been understanding and offered him a “marginal reduction” in the cost of raw materials but the experience has made Newman agonise over whether to let staff go.

That said, Newman - who was an active member of the Remain campaign - is staying positive about the UK's exit of the EU.

He said: “Ultimately we can have our cake and eat it if we extricate ourselves and negotiate free trade deals and free movement of labor.”

Likewise, ask any food ingredient company and they reel at the thought of tariffs being introduced.

Paul Collins, director of International Sales and Marketing at the Germany-based ingredient company GNT Group, said he is hoping that there will be no “punitive tariffs”.

He said: “The short term effect has been the effect of currency between the pound and the euro. We cannot influence that and as we have seen it changes over time anyway.”

“Brexit news caused a real short term spike, but these things tend to settle down and the market will become accustomed to that.”

Contingency plans
Nestlé chief executive Paul Bulcke recently said that until Article 50 is triggered (likely to be March 2017) it's too early to reassess its strategy towards the UK market. But other businesses are moving faster and are already looking to mitigate risks.

Ornua is Ireland's largest dairy products exporter, with a presence in 100 markets including the UK, which does not make enough dairy products to meet its domestic needs and imports around 1.6 billion litres of Irish milk into the UK every year.

Ornua executive Jeanne Kelly said that Ornuia was taking a number of measures to mitigate the risks to such an important market as the UK.

Speaking to FoodIngredientsFirst, Kelly said: “Clearly the decision by the UK to leave the EU has created considerable political and economic uncertainty and its overall implications are still very unclear.” 

“Given that it is and will remain a very important market for Ornua we are monitoring these developments closely and are ensuring that we take, where possible, appropriate actions to minimize and manage any downside risks that might occur.”

These include managing its currency exposure and “ensuring that our UK operations are as efficient as possible with increased emphasis on lean manufacturing practices, the driving of efficiencies and procurement savings.”

Impact on policy
Negotiations on labor, immigration, trade and agriculture will have a huge impact on the food industry but there is still little clarity as to how this will pan out in the post Brexit world.

Professor Lang is largely damning about the impact leaving the EU will have on the food industry, pointing out that the UK is highly dependent on the EU to feed us. 

Furthermore he points out the possible loss of EU workers which make up the backbone of food services and food manufacturing industry should strict labor rules be imposed, could be devastating.

Belonging to the EU has presented “benefits to the environment, benefits in public health and benefits in consumer standards,” he tells FoodIngredientsFirst, saying that the EU has acted as a champion of cross-border compliance on a number of key food related issues.

One example of a positive EU regulation emanating from the EU and adopted into UK rules is the EU Health and Nutrition claims regulation, according to Malcolm Clarke, co-ordinator of the Children’s Food Campaign at food campaigning group Sustain, which has meant that companies are now more rigorously held to account for false labeling claims, such as on sugar content.

On the other hand, the UK could now be free of squabbling between EU nations when it comes to adopting food polices. 

For instance, it will no longer suffer a similar to fate to when the Italians put a kybosh on plans to introduce Britain’s original traffic light system labeling, after the Italians successfully lobbied the European Commission that it discriminated against some of its most prized delicacies.

Adam Couch, CEO of gourmet sausage maker Cranswick, who wanted to stay in the EU, is not anticipating being hamstrung by tighter regulation from the UK once it has exited the EU.

Speaking to FoodIngredientsFirst, Couch said: “My general view is that the UK has tended to gold plat (the process where a basic EU directive is given extra strength when being incorporated into UK law) most standards.”

“We have got some of the finest, outstanding food processes and practices within the world. we have a proud heritage of which we should maintain.”

The only upside Lang can see for the food industry in the post-Brexit world is there will be some job creation, albeit minimal and in the civil service, which he says will have to staff up as they look to “rebuild” the nation's food policy.

As officials work out which EU rules will be dropped and which will be adopted by the UK, the spotlight is likely to be thrown onto the relationship between Leadsom, who was a prominent Brexit advocate, and the food industry, which was mostly behind the Remain campaign, and whether they can work together.

Opportunity for GM Crops
One consequence of exiting the EU could see British farmers facing a $2bn black hole should support payments for individual farmers be cut once Article 50 is enacted. 

To help offset this cost, the government has been championing the virtues of GM crops as a potential new revenue steam to help struggling famers lift their profits.

George Eustice, agriculture minister, last month said: “It would be a good thing if the UK, post-Brexit, decided to develop its own system for licensing all crops that was truly science-based.”

“If we are going to make the next leap forward in yield and productivity and wean ourselves off dependence on chemical pesticides, I think there is a crucial role of genetic technology.”

Analysis carried out at Germany’s University of Goettingen found that switching to GM crops from conventional crops increased yields from between nine and 25 percent.

While the commercial use of GM crops will prompt fierce debate, public opinion in the UK is largely in favor of their introduction and, with farmers facing an uncertain future, it could prove a much-needed salve for them.

It is no doubt that the big agrochemical giants- Monsanto, Dow, DuPont, BASF and Syngenta-will be monitoring the situation closely to see if opportunities present themselves.

Conclusion
Currency fluctuations may be the most immediate concern for the food industry but once Article 50 is triggered, bigger concerns, such as tariffs and restrictions on migration and labor, could be around the corner. 

Yet such uncertainly presents plenty of opportunities for the food industry to take a lead whether it be through government lobbying or introducing new products and strategies.

by John Reynolds