Facing the Brexit challenge

With the clock ticking down towards March 2019 and the two sides no nearer clarity in terms of the eventual post-Brexit trading relationship between the UK and the EU, Irish food exporters have little choice but to prepare for the worst while hoping for a better outcome.

"Brexit is the most significant economic challenge of the past 50 years that Ireland must face,"says Eddie Hughes, Dairy and Functional Food, Beverages and Food Technology manager with Enterprise Ireland. "Over the coming years we can expect uncertainty, structural and disruptive change and serious challenges for Irish companies, with implications for all food sub-sectors."

Explaining the scale of the issue, Hughes points out that the UK is quite often the first export market of choice for Irish food companies as well the most significant export market for many UK suppliers to this island.

“Overall, the value of Irish food and drink exports increased by 13 per cent in 2017 to €12.6 billion and the share of those exports destined for the UK declined from 37 per cent in 2016 to 35 per cent in 2017,” he adds. “Food and drink exports to the UK were worth €4.5 billion in 2017. Fresh produce, prepared consumer foods, beef and cheddar cheese are the sectors most sensitive to the potential impacts of Brexit.”

Enterprise Ireland believes the UK will continue to be a natural priority market for Irish food exporters, despite Brexit, due to its geographical proximity, a common language, common values and a similar food consumption culture in food and trade. “We are encouraging and supporting our food client companies to sustain their existing business in the UK, to look for new UK business opportunities, as well as looking at business growth opportunities through diversifying into new food products and markets,” says Hughes.

Enterprise Ireland has introduced a number of specific measures and supports to help client firms deal with Brexit. These include funding of up to €5,000 to help exporters develop a Brexit action plan; an online Brexit SME scorecard which allows companies self-assess their exposure to Brexit and get an instant report which includes actions, resources and information about events that can help companies to prepare for it; and a series of countrywide Brexit advisory clinics featuring expert speakers to encourage clients to adapt their business strategies.

Currency volatility

KPMG partner David Meagher says currency volatility is already affecting exporters. "As soon as the vote happened, an immediate consequence was a very significant change in the exchange rate," he says. "Exporters have battled through that and the exchange rate appears relatively stable at the moment. There is a significant danger that it could move again. Exporters should consider now whether it is opportune to cover forward if they can live with current rates."

The next big area is trade barriers and tariffs and all that goes with them. “It is incredibly difficult to tell how that will play out,” Meagher adds. “There is no upside to a hard border. Exporters need to be clear in relation to their logistics arrangements, for example. In some cases, it will be simple, but in others they might be importing raw materials from the UK and then exporting product back to the UK and to the EU via the UK. They have to make sure they know exactly what the flows are.”

Deloitte partner David Carson believes there are opportunities as well as challenges. "It is very complicated," he says. "I can't think of another sector that will be impacted as badly as the food sector. Companies have to plan for the worst and hope for something better. But it's not all downside by any stretch of the imagination. The biggest opportunity for Irish companies is where UK companies face difficulties accessing the European market post-Brexit. We have been very European in outlook for a very long time and will have to become even more so in the future."

Many companies feel overwhelmed by the scale of the challenge and this is posing a risk as well, according to Carol Lynch, a partner with BDO. "Many of them feel that there is so much to do that it's difficult to know where to start," she says. "The best thing to do is look ahead to what might happen and work backwards from there. The worst case is that the UK crashes out with no deal in March 2019. The best case is that it is January 2021 with a free-trade deal. They need to plan for the worst and hope for 2021. If it is 2021, most of what's in the plan will be stuff they have to do anyway."

She advises companies to build in timelines for the various authorisations they will need. “Trusted Trader status, for example. That takes a good six months here to get through the Revenue Commissioners process and HMRC [Her Majesty’s Revenue and Customs] is saying that it can take up to a year over there. HMRC also says 40 per cent of applications will fail. Companies need to start looking at that right now. At the end of the process, at least you have a plan and then it is not so scary. Scary is looking into the unknown and saying you don’t know what to do.”

Hit on margins

Teagasc research officer Kevin Hanrahan says farmers and food producers will have to be prepared to take a hit on margins, whatever the outcome of the negotiations. "The current talk about a free-trade agreement with zero tariffs is good but the UK would still be outside the customs union and the single market. There will be barriers to trade. A free-trade agreement will mitigate damage but there will still have to be customs checks and so on. The main point of pain will be the lower-value products. Low-margin products may not be able to survive the additional costs imposed by customs checks, checks on standards and paperwork. Even the most benign outcome will be negative for agriculture."

Johnny Hanna is a partner in KPMG’s Belfast office and sees things from a different perspective. “A very significant number of EU nationals are employed on farms and by companies in logistics and in factories in Northern Ireland,” he notes. “While there have been some welcome statements in recent months, there is still a big question mark over companies’ ability to attract EU nationals in future. There is a big unknown in relation to immigration policy. Companies shouldn’t let their talent and workforce drift away because they are not talking to them. They will also have to adopt a more strategic workforce policy to deal with possible future restrictions.”

Hanna makes one final point which many exporters are not yet considering. “A big issue for SMEs will be VAT. At the moment, business-to-business sales within the EU are effectively VAT-free. After Brexit that is going to change and VAT rates of 20 per cent will have a very significant impact on cash flow. Companies need to do the analysis now of what that could mean for them.”