Dairy reacts to Brexit vote

By Jim Cornall

- Last updated on GMT

The UK is leaving the European Union. It will take time for negotiations to take place, but what are the potential implications? And what does the dairy industry have to say? Photo: iStock-AlexLMX
The UK is leaving the European Union. It will take time for negotiations to take place, but what are the potential implications? And what does the dairy industry have to say? Photo: iStock-AlexLMX

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Following the decision of the British public to leave the EU, attention has turned to how business will be affected, how negotiations will take place and the timescales involved.

The UK voted to leave the EU, however, there were strong regional divisions, with Gibraltar, Scotland and Northern Ireland both voting to remain in the EU.

European Parliament president, Martin Schulz, following the extraordinary Conference of Presidents this morning, said that the European Parliament would meet on Tuesday “to adopt resolution assessing the outcome of the referendum of today and describing the necessary next steps of the European institutions, especially the European Parliament itself. On the basis of article 50 of the treaty the EP is fully involved in the next steps.”

He added, “The line of the EP is quite clear – we are very sad about the decision of the voters in the United Kingdom but it is a sovereign expression of the will of British voters to leave the European Union. This is a difficult moment for both sides.”

Nation of shopkeepers

In terms of business, Christian Verschueren, Director-General of EuroCommerce, said, “This is a sad day, but also a wake-up call for Europe and for the future direction of the European Union. We must respect the will of the British people, but we will miss the liberal and forward-looking policy input of a country which has been a driving force in the single market, better regulation and open global trade.

“Britain is the nation of shopkeepers, and the dynamism of British retail has made it a leader in innovation in the high street and online.”

For the dairy industry, Dairy UK’s ‘Exporting Dairy to the World’, published in January 2016, noted that UK dairy exports outside of the EU have increased by 91% in volume over the last five years through to the end of 2014.

During the same period, the volume of exports within the EU increased by 28%. In 2014, the value of dairy exports totalled £1.3bn.

Comment from industry

Dr Judith Bryans, chief executive of Dairy UK, said, “The UK dairy industry is adaptable, resilient and determined, with the skills and innovation to rise to the many challenges we encounter.

“Dairy UK did not take a side in this debate because we knew that regardless of the result, we would continue to operate in a global dairy market place and demonstrate our unwavering commitment to give the public nothing but the best of UK dairy.”

Bryans said that Dairy UK will continue to liaise with the UK Government, devolved administrations and all relevant organizations to promote the interests of the UK dairy sector to help steer industry in the right direction.

“We have an outstanding UK industry producing world-class products and our people have the ambition and the determination to succeed.”

Arla committed to UK

Arla Foods, based in Denmark but with operations in the UK, said that the outcome of the exit agreements will be crucial to Arla as the UK is the company’s biggest single market.

Peter Giørtz-Carlsen, head of Europe, Arla Foods, said, “We are disappointed by the outcome of the referendum. However, we respect the decision by those in the UK and, ultimately, it is their choice to leave. We have continually supported a well-functioning and strong EU which focuses on ensuring the continued free movement of goods, services, people and finances. 

“However, we will work with the UK government and other relevant stakeholders to maintain that in so far as we are able to, in the post-Brexit environment.”

Arla said it will focus on minimizing any potential negative impact on its business as a result of the upcoming Brexit and preserving the free trade between the UK and the EU that is so important to the company’s business. 

“The consequences of the Brexit vote will depend on the subsequent negotiations between the EU and the UK that are expected to take up to two years to complete.

“For Arla, it is important that a trade agreement is reached without import and export quotas or tariffs that will limit the free movement of goods. We will be following these negotiations closely, and mitigation plans are under way by Arla but it’s too early to comment on the many different scenarios that could arise,”​ Giortz-Carlsen said.

Short term and long term effects

As a farmer-owned dairy company with 12,700 owners from seven EU Member States, of which 2,700 are British, approximately 80% of Arla’s total global revenue is generated in the EU and more than 25% is generated in the UK.

“Most of our business in the UK is based on local production within the country, however, to utilize Arla’s European pool of 13bn kilos of milk in an optimal way, it remains critical that our products can move freely across the markets in which we operate,”​ Giortz-Carlsen added.

Arla said that in spite of the new challenges facing Arla and other companies after the Brexit vote, the outcome of the referendum will not change the importance of the UK market for Arla.

“The UK may have decided to leave the EU, but it will remain a key market for Arla,” ​concludes Giørtz-Carlsen.

Danish government reaction

Martin Bille Hermann, Danish State Secretary for development policy, Ministry of Foreign Affairs, said, “I am sad Britain has decided to leave. Instead of talking together about the issues that matter like job creation and controlling migration more efficiently, now we talk about Britain leaving.”

“The signal from the British is clear – politicians in the UK got the result they wanted – now they need to live up to it.

“Denmark is a member of the EU and we will continue to be a member of the EU. Polls show that the Danish want that. When you come down to the core are we stronger together or are we stronger separately – they have said we are stronger together.”

pound - philhol
Will the pound sink? The currency fell in the immediate aftermath of the Brexit announcement, with analysts cautious on long-term prospects. iStock: philhol

UK key market for Danone

French company Danone, which has operations in the UK, also commented with a statement.

“The UK is a key market for Danone – one of our top ten – and we have one plant there with around 1,200 employees working there. We are committed to our business there,” ​it said.

“Our objective is to mitigate the effects through our usual hedging policy and we will continue to monitor the impact.

“It’s too early to quantify the impact [in terms of trade, costs and prices] but what I can say is that our objective is to put in place the instruments needed to remain competitive.”

Staying out of the argument

Müller Group, which has operations in the UK as well as mainland Europe, said, “The result of the EU Referendum is not an issue which we would take a public position on. Our focus is on making great dairy products for our customers and consumers.”

Nestlé’s position was similar.

“We note the outcome of the referendum in the UK and the decision of the British electorate to leave the European Union,”​ a media spokesperson said.

“The practical consequences of this decision will become clearer in the coming months. Nestlé will continue to operate in the normal course and will follow developments closely.”

NFU sees uncertainty

Cargill told DairyReporter’s sister publication FoodNavigator that while Cargill believed that there were distinct advantages for the UK and member countries to remain together as part of the member of the European Union, “the priority now is to closely monitor the situation and ensure that our business interests are protected during the coming months, as the situation unfolds.”

NFU President Meurig Raymond said, “The vote to leave the European Union will inevitably lead to a period of uncertainty in a number of areas that are of vital importance to Britain’s farmers.

“The NFU will engage fully and constructively with the British government to construct new arrangements. This needs to happen as soon as possible.

“Our members will rightly want to know the impact on their businesses as a matter of urgency.  We understand that the negotiations will take some time to deliver but it is vital that there is early commitment to ensure British farming is not disadvantaged. It is vital that British farming is profitable and remains competitive, it is the bedrock of the food industry – Britain’s largest manufacturing sector.”

In 2014, according to the NFU, the main destinations of UK food, drink and animal feed exports were Ireland (£3.4bn), France (£2.1bn), USA (£1.9bn), Netherlands (£1.3bn) and Germany (£1.2bn). During the same year the UK imported food, drink and animal feed mainly from the Netherlands (£4.9bn), France (£4.2bn), Ireland (£3.8bn) and Germany (£3.7bn).

Copa & Cogeca

Copa & Cogeca said the Brexit marks a sad day for EU and UK farmers alike.

“We will work to ensure that the farming community does not pay the price for International politics,” their statement said.

Copa & Cogeca secretary-general Pekka Pesonen said a key point will be to avoid any further disruption to the European agriculture market, given the importance of the economic ties across the Channel and the current agricultural market crisis.

“Over half of UK food and drink exports currently go to the EU and the UK market is also a big export market for food and drink exports from other Member States, providing European consumers with a good, diverse choice of quality produce.

“We will work hard to ensure that the farming community in the EU or the UK are not the ones to pay the price for international politics and the impact on trade is minimized,”​ Pesonen said.

No change for Red Tractor - for now

Assured Food Standards chief executive David Clarke said that the Brexit vote, for the time being, means business as usual for Red Tractor Assurance.

"The UK remains a member of the EU for the immediate future and we will wait with interest to see the trading terms that the UK Government is able to negotiate with trade partners in Europe and further afield.”

Baby Milk Action

Patti Rundall, from Baby Milk Action, said that the International Baby Food Action Network, IBFAN (of which Baby Milk Action is a member), has as much reason as any to complain about the EU and has spent over 30 years trying to improve it.

However, she stated that her view was that it was “much more important to stay in and continue to improve it rather than get out.”​ 

She said that the EU laws on baby formula and food marketing and the transparency rules that govern EFSA that IBFAN helped bring in, “…although not nearly as strong as they should be – are better than nothing - and have improved the safety of baby food products somewhat and curbed some harmful marketing.”

Uncertainty from analysts

That uncertainty was echoed by analysts Euromonitor International.

Sarah Boumphrey, global lead, economies and consumers at Euromonitor said, “One key word will continue to overshadow the UK economy: uncertainty.

“The uncertainty will also flow-on to the EU itself - the UK plays a significant role in the EU, both economically and demographically. Economists were almost overwhelmingly united in their opinions about a vote to leave the EU – it would damage the UK economy.”

She added that the extent of the damage has been harder to agree on.

“Despite heightened fears of recession in the immediate aftermath, our macro model shows a 2.0% fall in GDP growth over five years stemming from a Brexit, with the biggest impact being felt in 2017.”

Concern for EU

However, according to Euromonitor, the uncertainty following a “leave” vote will also flow-on to the EU itself.

Euromonitor says that the UK plays a significant role in the EU, both economically and demographically.

It says that in 2015 the UK was the EU’s second largest economy – behind Germany. It is also out-performing the other large EU economies, contributing 35% of the EU’s economic growth between 2010 and 2015;

The UK was the EU’s largest consumer market, and was responsible for one-in-five dollars spent in the EU; again it is fast-growing, responsible for 56% of growth in consumer expenditure since 2010.

Changes are coming for both the UK and the EU following the Brexit vote - but how will both sides be affected? iStock-ronniechua

Euromonitor model

According to Euromonitor’s Industry Forecast Model, looking at forecast volume growth, in a Brexit scenario, confectionery, ready meals and sweet and savoury snacks would be the most-affected packaged food sectors in the UK.

As seen in the table below, dairy fares better than some sectors.

Boumphrey said that the uncertainty that will overshadow the UK for at least the next two years is one of the major challenges for business.

“This will undoubtedly damage business sentiment, put downwards pressure on investment and affect consumer confidence. There will be a direct impact on sterling, and this could push up inflation. So depending on the cost base of the business this could also have a negative impact – although for UK exporters a weak currency is a boon.

“Strategic and operational decisions will need to be made about where businesses locate their operations. I doubt we will see a wholesale removal of operations, but a rebalancing of where (geographically) business invests is likely.”

No impact on spending

Boumphrey said that Euromonitor industry forecast models are not showing a huge impact on consumer spending.

"Those categories that will be most-affected will be the discretionary items – for instance, confectionery. Staples are not driven by changes in income to the same extent. Overall we are not expecting a cataclysmic impact on consumer spending.”

As for companies exporting to the UK, Boumphrey said they should, “avoid knee-jerk reactions and take a calm and measured approach is crucial. The UK will not be leaving the EU overnight. Weighing up whether to pass on price rises to customers and end consumers is not a straight-forward choice.”

She noted that the UK economy would remain uncertain for the next two years while exit negotiations take place.

“The “Unknown unknowns” are a major challenge and this makes it difficult for companies to protect themselves. I think taking a cautious approach to investment decisions would be wise until the dust settles and we see the likely direction of the negotiations.”

Self-fulfilling prophecy

David Stoddart, analyst at Edison Investment Research, said that the great fear following the Leave vote is a collapse in the value of sterling.

“Surely every FD has covered against that so there should be no short term effect. Whether FDI falls to a level that leaves the pound permanently lower will depend on the policies that the UK adopts: were it to remain lower, gross margins would be squeezed to the extent that buyers could not re-source or that absence of the external tariff did not provide an offset.

“In the short term, a plunge in sterling would see sharp rises in fuel pump prices that would divert spending from other areas. That presumes that the Remain campaign’s threats about the extent of the economic nuclear winter that would follow Brexit have been ignored and that consumers are still spending.

“If they are not, the prophecy will have become self-fulfilling and will have hastened the collapse of more retailers and more high streets.”

euromonitor table

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1 comment

Copa Pekka

Posted by Jack,

The UK is a large importer and exporter of foodstuffs but all this movement has a price in pollution and global warming. 1 and a half million tons of fresh produce goes from Spain to the UK every year. How many truck loads ? Pekka must be Finnish and will remember pre EU days when the choice of yogurt in Finland was not sensational But now Danone Activa is in Finland coming from Hungary. Do we want refrigerated trucks operating 24/7 over all of Europe for no real reason ?

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