FDII director Paul Kelly hopes UK will remain part of EU single market

FDII director Paul Kelly hopes UK will remain part of EU single market

Paul Kelly, director of Irish food body Food Drink Industry Ireland, spoke with Ben Cooper about the challenges the sector faces in the wake of the UK's decision to leave the EU.

As the glory years of the 'Celtic Tiger' boom bear witness, Ireland was a significant beneficiary of EU enlargement, with its food exporters among the main drivers of the country's rapid economic growth. Following the referendum in the UK in June, the Irish food sector now looks set to be a serious casualty of the EU's first significant contraction.

As director of Food and Drink Industry Ireland (FDII), which represents Irish food producers, Paul Kelly has the unenviable task of leading the industry's response to the immediate negative consequences of the vote on 23 June while lobbying for the most beneficial outcome to FDII members of the Brexit negotiations.

Regarding the immediate impact of the vote, Kelly stresses the challenges the recent drop in the value of sterling has presented to FDII members. "What we're seeing now is a structural rather cyclical change in the currency and there's an expectation that sterling is going be weakened for a much longer period of time than would have been the case in the past," Kelly says.

While it is widely anticipated consumer food prices will rise in the UK next year as a result of the drop in the pound, Kelly believes there will only be "limited inflation" and suppliers will bear the brunt of the devaluation.

The negative consequences for Irish food companies of the currency shift, Kelly says, are being exacerbated by "an absolute resistance" from UK food retailers to pass through currency costs to consumers owing to the intense competition in the UK food sector, resulting primarily from the growth in hard discounters.

"I think the suppliers will end up absorbing a disproportionate amount," Kelly says. "No doubt there will be a certain amount of inflation at the consumer level but when you look at the speed and the depth of the weakening of the currency combined with market conditions, such as the growth in the discounters, I think you're likely to see limited inflation."

A report published by FDII in September included historical analysis of exchange rate fluctuations which suggested a 1% weakening in sterling equated to a 0.7% fall in Irish food exports to the UK. The UK currently accounts for 41% of Irish food and drink exports, equating to some EUR4.4bn (US$4.68bn).

Looking beyond the immediate impact of the vote to Brexit itself, Kelly concedes that "we're still very much in the realm of speculation". In its September report, the FDII said the Irish government's main objective must be "to maintain full unfettered access" to the UK market for Irish food and drink, but retaining access for the UK to the EU single market would be "much more preferable" than a bi-lateral trade deal.

However, Kelly concedes the political challenges in securing a deal that effectively retains current trading conditions are considerable. "Each member state naturally enough has its own interests and the interests of a country which is perhaps a thousand miles away from the UK is very, very different from Ireland, which not only is geographically close but shares the only land border. So, there's a very mixed view across the European Union." Countries that are less "economically integrated" with Ireland may push for a hard Brexit, he says.

"It's going to be very complex. We as a business sector simply put forward our position and try to ensure our position is understood and accepted by the Irish government, but also at Brussels level," Kelly adds.

The European Commission has insisted it will only begin negotiations once Article 50 is triggered but Kelly says FDII has opened channels of communication on the issue with other food trade associations in Europe, as well as discussing the implications for the industry of Brexit with Ireland's MEPs. "We feel the Irish food industry view needs to be communicated, understood and hopefully accepted at European level as well as at a national level."

Kelly says FDII has also established a "strong working relationship" on Brexit with the Food and Drink Federation (FDF), the representative body for UK food producers. Earlier this month, Kelly was invited to speak at a conference convened by the FDF to discuss the implications for Brexit.

The disruption to the Irish food sector would go well beyond the implications for commerce, Kelly explains. Aside from fostering strong trade in food between the UK and Ireland, he stresses the EU single market has been a catalyst for manufacturing and supply chain efficiency, with a constant two-way flow in raw materials and ingredients between the two countries, a considerable proportion of which will be within one company.

Indeed, advocates of the UK remaining in the EU, who may have been seeking the epitome of the single market functioning to the mutual benefit of member states, might have done a lot worse than to cite the movement of food between the UK and Ireland. "What you are seeing is the physical manifestation of the single market," Kelly says.

In addition, Kelly highlights the potential impact to the Irish dairy sector. "A lot of the milk produced in Northern Ireland is processed in the south so you could run into all sorts of country-of-origin issues after a Brexit if you have a mix of EU and non-EU milk, particularly to third countries such as China."

He also points out that a significant proportion of Irish food exports to non-EU countries transits through the UK, potentially creating further administrative costs for Irish food exporters. "The issue for food businesses generally is that we're operating off such tight margins that the type of cost disruptions that these things would cause are much more difficult to absorb than in other manufacturing and service sectors which operate off higher margins and have more margin flexibility."

With that in mind, is there another sector in a post-Brexit EU that would be as proportionately affected as the Irish food industry? "I would doubt it," Kelly says starkly. "It's a huge exposure for us." 

Kelly concedes that "over-exposure" to the UK as an export market has been a concern for the Irish food sector for some time, and it has been addressing this by increasing efforts to develop new markets. Indeed, he points out that the UK's share of Irish food exports has decreased from 44% to 41% over the past eight years but during that time food exports to the UK have risen by EUR1bn in value.

The potential of the UK leaving the EU and the single market puts greater onus on the broadening of Ireland's export markets but Kelly points to the practical challenges involved as the distance to destination countries increases.

"Market diversification efforts will continue both in Europe and in third countries but that varies from sector to sector. If you're in prepared food realistically it's a sector that is not going to travel to [the] far side of the world." The UK, on the other hand, "remains a very, very attractive market because of its size and closeness to us."

The potential to grow exports to EU countries importing from the UK is one possible opportunity that Brexit could in principle create for Irish food companies. However, Kelly is guarded when asked if there would be any upside to a hard Brexit.

"Whilst we would be pushing for diversification into other markets, that is simply to accelerate what we're doing already but in an overall sense we can't see any upside from this unless the existing conditions, which would be the single market access the UK has, could be maintained," Kelly says. "The only potential for an upside would be for things to stay as they are so that's what we're calling for."