Why Brexit’s legacy on food and drink will outlast Covid-19

09 July 2021, 09:41 AM
  • While the pandemic’s impact on the food sector is beginning to fade, Brexit’s effects are just beginning to be felt, argues Mark Lynch, partner at Oghma Partners
Why Brexit’s legacy on food and drink will outlast Covid-19

Over the past year, conversations around Brexit have undoubtedly taken a backseat to the pandemic: when 1st January arrived, and the transition period for Brexit ended, for many it seemed that this was almost inconsequential relative to Covid-19. However, while the pandemic has had a more significant impact on mergers and acquisitions within the food industry over the last twelve months, Brexit is likely to leave a lasting legacy for several reasons.

Firstly, on a strategic level, Brexit has allowed more long-term decisions to be made. With trade deals being negotiated, international businesses which initially held back on investing in the UK due to tariff uncertainty have set their sights back to investing. At the same time, others are reconsidering the attractiveness of the UK market.

Most recently, the free trade agreement in principle between the UK and Australia set a precedent for how the UK will engage with countries such as New Zealand and the US, which has implications for farming and raised fears amongst the UK farming community. Ultimately many UK farmers will probably struggle to compete on world market terms simply due to the limits of British geography, and as we have seen with other industries such as steel and ship-building there is no long-term right to produce any specific product in the UK if a market is opened up to competitive forces.

This fear of competition by the farming community is understandable, given the fact that Australian cattle herds are, on average, almost twice as big as those in the UK and sheep flocks 6.4 times as big. As Britain continues to strike trade deals, it will be important for the food industry to continue engaging with the government to understand what their vision is for 2030 and beyond in relation to industries such as agriculture. The drastically altered landscape for this sector will undoubtedly result in many within the UK farming industry fulfilling a role they had not originally signed up for, and ultimately resulting in a wave of consolidation as external competition makes its impact.

Secondly, for businesses such as the fresh meat industry or shellfish industry where exports to the EU might be a material if not majority of their business, there is a very simple challenge of survival.

When the UK made the decision to leave the EU, we placed ourselves in a position where we needed to abide by the rules set for third party countries. Sadly, this has led to barriers for UK companies exporting to the EU, and without significant goodwill on the part of the EU, many small food exporters may simply decide that it is too much hassle to export small quantities of product to Europe.

Already, the trade barriers can be seen to have impacted exports: according to data from the Food & Drink Federation, the ongoing impacts of the Covid-19 pandemic, and the change in Britain’s trading relationship with the EU, have led to a 28% fall in UK food and drink exports in Q1 2021 when compared to 2020, and a 36% fall when compared with pre-Covid-19 Q1 2019 figures.

Exports to nearly all EU member states fell significantly, and for the first time in the FDF’s reporting, exports to non-EU markets exceeded those to the EU. Under these circumstances, unless some solution can be found to improve the ability of UK businesses to export, the greater concern will be the cessation of business rather than any deal driven activity.

A final and quite visible impact of Brexit has been that food companies have been setting up distribution and in some cases manufacturing hubs in the single market (including Northern Ireland) to try and ease exporting within the EU, with Wyke Farms (the cheese supplier) one such example. In due course, we expect deal flow to reflect that some companies may prefer acquiring EU assets rather than establishing new operations as a lower risk and better return approach to tackling the Brexit challenge. With the UK government soft pedalling, so far, on introducing similar non-tariff barriers to trade, as the approach hardens we may see an increased push by EU based firms to acquire in the UK to circumnavigate the Brexit created issues that British firms are now dealing with.

As the post-pandemic world comes into view with the rollout of vaccines globally, Brexit will no doubt move up the agenda as companies shift from fire-fighting to long-term strategy and planning. We foresee that government trade policy will have long-lasting effects on the landscape of the food industry.

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