UK – The UK economy stands to be hit negatively in case the European Union (EU) and the UK fail to agree on a Brexit deal, while the transition to this situation will be ‘sudden and far-reaching’, says Rabobank.

In a research note titled ‘Consequences of hard Brexit on the Food and Agribusiness’, Rabobank says that there is a significant likelihood of disruption of regular trade between the EU and the UK, impacting the food and agriculture industry significantly, with likely effect on labour availability, grain exports and the fishing industry, among others.

A so-called ‘hard Brexit’ will occur when the UK fails to strike a deal with the EU, essentially making the UK to become a ‘third country’ to the EU on 30 March 2019.

This is opposed to the draft deal which has faced challenges being adopted by the UK Parliament, in which Rabobank said in a previous note that the longer-term impacts of leaving the EU with a deal will be felt over the period of 2-4 years, instead of immediately in case of a hard Brexit.

In case of a hard Brexit, UK companies will lose access to the EU market for exports of most agricultural products, due to the introduction of import tariffs at the EU border, immediately.

Trade tariffs impact

Rabobank says that in the absence of a trade deal, WTO tariffs will apply to all EU imports originating from the UK, just as they apply to imports from other third countries.

Since for agricultural products, these tariffs are significant and oftentimes prohibitive for trade, UK suppliers will lose access to the EU market.

Imports of dairy products, beef and sugar will be hardest hit due to the more than 30% import tariff imposed by the EU, while pork, poultry, seafood, eggs, fruit and vegetables, grains and consumer foods, with a medium tariff of 10-30% will also face a hard time being sold into the EU market.

However, flowers, fertilisers, oilseeds, beverages and tropical products with a 10% import tariff will find it easier to access the EU market.

The report says that in a hard Brexit scenario, it is most likely that the UK will not introduce import tariffs for imports from both the EU and other countries and is expected to be less restrictive as it is dependent on imports for its food needs.

However, some sensitive UK products might receive protection by setting import tariffs, e.g. sheep meat and beef, products.

New administrative and border hurdles

Rabobank reveals that in case of a hard Brexit, for EU companies, the administrative burden of trading with the UK will increase, and the complexity of trading in the EU and UK will also increase.

The report stresses that companies trading between the UK and the EU need to register as exporters/importers, while regular border controls procedures will be imposed between the two regions.

“Furthermore, for live plants, phytosanitary certificates will be required, and for live animals’ veterinary certificates are needed.

Some products – such as food from animal origin – can only be imported into the EU via border inspection posts. Not every port has a border inspection post, and, therefore, this requirement could lead to a redirection of trade flows.”

To complicate matters, in some cases, authorisations by UK authorities will no longer be valid in the EU, while food labelling will also have to be adapted, as non-EU origin must be mentioned explicitly on many food labels for products from the UK entering the EU.

The report adds that trade between the Republic of Ireland and Northern Ireland will be a highly contentious issue in case of a ‘hard Brexit’.

“In theory, cross border traffic of agricultural goods will be subject to the same customs procedures as in other instances of EU-UK trade.

This would entail a hard border between the Republic of Ireland and Northern Ireland. Border crossing of, for example, fresh milk, live animals and barley and alcohol for whiskey production may become too costly due to import tariffs and Customs requirements.”

This will negatively affect for example, the dairy industry, considering that 30% of Northern Ireland’s 2.2 billion litres of milk is processed in the Republic of Ireland.

Weaker British Pound impacts trade

In the case of a ‘hard Brexit’, the report reveals that the British Pound (GBP) is expected to slide towards parity with the Euro, from 0.88 to the Euro, a depreciation of the GBP 10-15% to the Euro.

The weaker Pound will increase the domestic prices of most agricultural products by this percentage since the UK is a net importer for most agricultural products, leading to a rise of import prices by the same margin, which in return will pull up prices of domestically-produced products.

While UK farmers will benefit as a result of the price increase, UK consumers will see food price inflation rise, putting further pressure on margins the food processing and marketing industry in the country.

The report argues that food price inflation due to the weakening of the GBP, in combination with slower economic growth will lead to consumers trading down to cheaper products while non-UK inputs (agricultural machinery, energy, fertilizers and crop protection chemicals) will rise in price contributing to a rise in cost price at farm level, taking back some of the gains from higher product prices.

Quality standards for imports to remain

“We do not expect the UK to lower its quality standards compared to today’s situation. Therefore, imports from non-EU countries will be limited, at least in the short term.

This will especially be the case for sectors in which suppliers from third countries face difficulties meeting these quality standards,” Rabobank says.

Hormone-treated beef, chlorinated chickens, GMO grains and oilseeds of varieties that have not yet received EU approval will continue to face the same restrictions in EU and the UK, while private sector standards, such as animal welfare standards in pork, will continue to exist, creating barriers to imports from suppliers that are not compliant with UK standards.

Further, sensitive products including fresh produce and flowers will face delays at the UK-EU border, from both sides, which could lead to a loss of value or quality due to the border checks and controls that could lead to significant delays.

Food industry impacted

The report further reveals that in the case of a ‘hard Brexit’, changes in immigration laws, fishing rights and grain imports could add further pressure on the food industry in the UK.

With the UK expected to move to skills-based immigration system after Brexit, allowing access to the UK only for people that have skills that are needed in the UK and that are sponsored by companies operating in the UK, the more restrictive policy on immigration, and the expected depreciation of the GBP, will result in lower availability of foreign labour in the UK, which will hit food business players hard, as about one-third of employees in the food value chain are EU citizens.

Rabobank says that the fisheries sector in both the EU and the UK will face serious economic losses in case of a hard Brexit.

For seafood, a ‘hard Brexit’ entails serious damage to both UK and EU fisheries industries as long as there is no agreement in place for access to each other’s fishing waters and markets.

In the absence of a fisheries agreement after Brexit, EU vessels will lose access to UK waters, while the same goes for UK vessels to EU waters,” notes Rabobank.

For EU vessels this would mean a loss of over GBP 500 million in value in seafood that they can no longer catch from the UK’s Exclusive Economic Zone.

For UK vessels, loss of access to the EU-market would also be damaging, as the UK will lose this important market, which amounted to GBP 1.3 billion in 2017, or 70% of the UK’s total seafood exports.

In the case of a hard Brexit, theintroduction of import tariffs on UK grains at the EU border will make UK imports uncompetitive on the EU market, forcing UK grain exporters to find new export destinations for their grain exports.

The key question in grains is what will happen to the 1.2m tonnes of grains that are currently processed into ethanol as part of the EU biofuel policy, that requires blending of biofuel into normal fuels.

Critically for the grain sector, if the UK does not continue with the EU biofuel policy that converts 1.2 million tonnes of UK grains per year into ethanol, the report notes that biofuel production will become unattractive in the UK, creating an additional supply of grains on the UK market, resulting in significant price pressure for grains.

This would benefit the animal feed industry, the livestock industry that uses feed as input, the milling industry and in the longer term the beer and whisky industry due to lower-priced barley, as farmers would switch to barley.

One sector that may gain from a hard Brexit is the UK’s sugar industry, reveals the report, as EU restrictions on the import of raw sugar from third countries will no longer apply, hence the underutilized capacity for raw sugar refining in the UK can potentially be put into operation with additional imports of raw sugar.

It adds that contrary to the situation in other sectors, quality standards are not expected to be an obstruction to imports in the sugar sector.

“As a result, UK beet sugar producers would face increased competition from these lower-cost raw sugar imports.

Therefore, it is imaginable that some import restrictions could be created. For the EU, the increased import of raw sugar in the UK could potentially replace 300,000 tonnes to 400,000 tonnes of EU white sugar exports to the UK.”