Many careers have been forged over the last 20 years in the crucible of Europe's byzantine agri-monetary system. That will change with the onset of the euro, as the business of trading food is simplified and the agri-monetary system is effectively wound up.
In the longer-term, the euro will encourage further structural change in the food processing industry. For many years the Common Agricultural Policy operated a shadow "green" exchange rate system, designed to ensure agri-susbsidies and support payments were smoothly converted into local currencies.
A mechanism called monetary compensation amounts (MCAs) was used to impose taxes or subsidies when real exchange rates diverged from pre-set green levels. In being exposed to this system, Irish food processors are acutely aware of the benefits of a simpler single currency. The abolition of MCAs in 1996 and the inevitable removal of the green exchange rate will reduce the cost and resources required to manage a food processing concern in Europe. From a Irish food manufacturer's perspective, the short-term benefits of the euro are:
Exports to euro economies will occur without exchange rate risk. Given the low margins that many food products generate, the risk associated with exchange rates has often deterred Irish companies from pursuing opportunities in some European economies. The euro will remove that uncertainty and encourage processors to broaden their target markets.
A low inflation and interest rate environment is optimal for food manufacturers. Working capital requirements are often high as food processors hold relatively large volumes of stock - low borrowing costs minimise this.
Benign inflation also helps companies control costs. Food production is capital intensive and requires sustained investment in equipment and plant. Low inflation ensures cost overruns are minimised. In the past 25 years, Irish food companies expanding abroad have seen the British and US markets as natural targets. A common language and corporate culture has encouraged that trend. Continental European economies have often been viewed with suspicion. They were perceived as awkward markets in which to operate, compounded by language, distribution and bureaucratic difficulties.
The euro process should help change this. The single currency is just one part of a comprehensive programme designed to create a single economy in which legal, accounting and marketing standards converge. In turn, this will establish an environment where large corporations evolve as pan-European organisations.
Both food retailers and manufacturers will be caught up in this momentum. The implications of such a trend for the Irish food sector are as follows.
Retailers are likely to assume a multi-market approach to managing their suppliers. Already, it is evident that the concentration of retailing in Ireland and Britain is causing change for manufacturers. Those with the capacity to assume scale production are offered access to larger contracts, while smaller companies with fewer resources are being squeezed.
A number of Irish companies supply ingredients to trans-national food manufacturers. Companies such as Unilever and the snackfood company Frito-Lay are creating pan-European businesses and expect their suppliers to match demanding growth plans. This will encourage greater investment in product development and scale.
The single market is a two-way street. Opportunities abroad are somewhat offset by the opening of the Irish market and the introduction of the euro, allowing other European food companies to supply domestic consumers. That will ensure the pace of competition within the Irish food sector intensifies.
A number of Irish companies are already positioning to exploit opportunities throughout the EU food market. Fyffes has built a strong business supplying fresh produce across seven EU states. Kerry Group has recently purchased a supplier of flavouring and coating ingredients which, together with earlier acquisitions, gives it a presence in almost every EU economy. Other Irish companies, including Golden Vale, Greencore and IAWS, have also acquired businesses in the European cheese, malt and fertiliser markets respectively. This pattern is expected to continue as the importance of the internal European market grows and access to it becomes easier.
A key omission to the overall euro process is sterling. Britain remains an important export market for Irish food groups. Irish companies also control a large segment of British-based food manufacturing, including meat, dairy and cereal products. The exclusion of sterling from the euro, with its associated exchange rate volatility and relatively high interest rates, makes it a difficult market to manage. With sterling strong, the problem is lessened, because Irish exports are competitive and translated British profits are buoyant. However, an ideal scenario would incorporate sterling within the euro, thereby providing a true European single currency within which Irish food companies could flourish.
Joe Gill is head of equity sales with ABN AMRO Stockbrokers
