Summary
With UK and EU exporters of short shelf life products fearing severe trade disruptions in the first weeks of 2021, the question arises: what strategies should ACP exporters serving the UK market via the EU seek to set in place? This will require careful planning. Possible options include moving over to direct exports to the UK, shifting to onward shipping via UK east coast or inland ports to side-step Kent traffic congestion, or diversifying markets away from the UK. If routes to markets cannot be adjusted a critical issue will be the distribution of the additional costs within the supply chain (of which currency depreciation is one dimension). This will also require careful attention, particularly in regard to contractual arrangements for the delivery of goods to the UK at the beginning of 2021. If ACP exporters exclusively bear the additional logistical costs and losses arising from delays, this could undermine the commercial viability of such exports. A no-deal UK departure could also lead to both EU and UK export surges of certain agri-food products to 3rd country markets. This is particularly the case not only for poultry meat and long-life dairy products, but also products like onions, where alongside West African markets the UK market is a major market for Dutch traders. Were such export surges to threaten local producers, ACP governments would need to look at adopting remedial trade policy measures. Where no local ACP production is affected, ACP importers could capitalise on low priced ‘surpluses’ arising as a result of EU/UK trade disruptions.
In press reports in the second half of October it was suggested some British food exporters were considering ‘pausing’ sales to the EU market in the first weeks of 2021 ‘to avoid the worst of the suspected traffic chaos at the end of the transition period’. Under the current ‘Operation Brock’ traffic management system, ‘only seafood and day-old chicks will be authorised to skip the queues, leaving other perishable food exporters concerned their goods could expire while waiting on the road’ (1).
The Managing Director of the organic dairy co-op Omsco, Richard Hampton, has suggested the company ‘will actively opt out of shipping perishables to Europe for at least the first two weeks of January to see what the M20 looks like.’ He has indicated the company will ‘redirect its milk into alternative products for other markets in the short-term’, although this solution would ‘start to become a challenge if the heavy traffic delays continue beyond February’. Sheep industry representatives have indicated similar strategies could be adopted for lamb sales (1)
The likely seriousness of the export situation is leading to calls for UK government support to be made available to the most vulnerable sectors. This includes the UK lamb industry, where 90% of all UK lamb exports go to the EU, the dairy sector where 78% of products not consumed in the UK are exported to the EU and the beef sector where 82% of UK annual exports go to the EU (2).
The animal product trade is particularly vulnerable to no deal outcome disruptions, given the failure of the UK government to secure a formal listing of the UK as a Third Country eligible to place animal products for sale on the EU market. Even once such third country listing has been secured, ‘each individual (UK) food manufacturing plant will then need to be formally approved as well’, with this requiring a ‘physical inspection of each and every plant’.
The British Meat Processors Association has pointed out if such ‘inspections are required, this could see British food manufacturers waiting in line for formal listing before they can export anything further to the EU.’. Currently ‘while a request has been submitted by the UK, there is… no firm indication as to when the EU will consider and vote on formal country approval, let alone when and if plant inspections will be done’ (3).
In terms of exports from the EU to the UK the European Dairy Association, has indicated ‘EU exporters will likely send a test truck to the border to assess the situation’, with if substantial delays are faced, further shipments being suspended.
Against this background EU dairy businesses are looking to build up ‘inventories in the UK ahead of Christmas’, although this will be constrained by the ‘lack of available cold storage in the UK’ and the limited shelf life of certain dairy products such as yoghurt; where ‘stocks will last a maximum of about three weeks’ (1).
These short-term effects will be compounded by the long-term structural costs arising from a no-deal outcome to the current EU/UK negotiations. The British Retail Consortium has estimated 85% of food imported from the EU would face more than a 5% tariff, while the ‘average tariff on food imported from the EU would be over 20%, including 48% on beef mince, 16% on cucumbers, 10% on lettuce and 57% on cheddar cheese’ (4).
In certain sectors this could lead to a major reorientation of the sourcing of food products currently imported from the EU. While such a development would run against the Covid-19 inspired move towards shortening supply chains, this fear is so acute the Spanish fruit and vegetable sector has launched a webinar to analyse the impact the application of UK MFN tariffs under a no-deal outcome would have the competitive position of individual Spanish products vis a vis competing 3rd country suppliers (5).
It is feared the disruptions in the first weeks and months of 2021 will be such that there will be high food price inflation in the UK across a range of short shelf life products (see companion epamonitoring.net article, ‘Report Spells Out Impact of Brexit Scenarios for Food and Beverage Supply Chains’, 20 October 2020).
However, in terms of the impact of border disruptions on the volume of trade, this needs to be placed in perspective, with the situation varying between different short shelf life products. Fruit and vegetables for example, are seen as a daily necessity, which given the lack of self-sufficiency in the UK, will need to be imported regardless. The impact therefore would not primarily be on imported volumes, but rather the prices paid by consumers.
Cut flowers, however, are a different matter. These are not a daily necessity and there is far less scope for passing on increased costs to consumers (including the value lost due to delivery delays). As a consequence, producers, exporters, and traders will largely have to bear these increased costs, with a key question being: how will these increased costs be distributed along the supply chain? (6)
In addition, in the first 3 months of 2021 the ‘hidden monster’ of currency devaluation will overhang trading operations. It has been highlighted how ‘currency observers expect the pound to fall by 5%-10% in the coming months if no deal is agreed…under these circumstances, suppliers importing food into the UK could be forced to bear the immediate brunt of the cost.’
According to David Sables, CEO of Sentinel Management Consultants, while ‘costs such as customs and potential tariffs should be passed onto supermarkets within days’, currency fluctuations commonly ‘require up to three months’ notice under typical contractual agreements’ to feed through to prices paid by supermarket buyers. This arises from the fact that normally ‘currency fluctuations are expected to be managed by suppliers like any other variable cost such as labour, ingredients, or crude oil, and therefore typically require further negotiation with retailers’ before they can be passed on (7).
While typically larger businesses hedge against currency movements, it is held ‘demand uncertainty due to coronavirus and concerns over Brexit-induced border disruption are inhibiting many suppliers from doing so ahead of the transition period’. Equally, while in the past supermarkets have ‘helped suppliers to hedge currency’, with this being part of ‘fair trading practice’ commitments, the scale of current disruptions and challenges may well be such that past action can be no reliable guide to future action (7).
This ‘hidden monster’ of currency depreciation in seen as being ‘particularly acute for importers of fresh goods who are reliant on a steady flow of goods arriving from Europe’. Nigel Jenney CEO of the Fresh Produce Consortium sees currency fluctuations as a ‘serious concern’ given even small changes could mean ‘somebody in the supply chain will likely not break even’ (7).
The currency issue thus compounds the wider concerns around trade disruption in the new year which will face any goods moving across an EU/UK border at the beginning of 2021.
| Comment and Analysis Plans on both sides of the channel for the introduction of a ‘pause’ in UK/EU cross border movements of short shelf life products at the beginning of 2021, raises the question as to the shipping strategies being put in place for the beginning of 2021 by ACP exporters who ship short shelf life products to the UK via the EU Particular challenges will be faced by those ACP cut flower exporters who are largely dependent on shipping via the Netherlands and Belgium (Uganda, Rwanda, Tanzania, Zimbabwe and to a lesser extent Ethiopia) (see companion epamonitoring.net article, ‘Cut Flowers Sector Concerns Over Proposed UK Border Controls Highlighted’, 23 September 2020). ACP cut flower exporters will have far less scope for passing on cost increases to UK consumers than similarly placed fruit and vegetable exporters who supply daily necessity products. Main Southern and Eastern African Cut Flower Exporters to the EU28, Netherlands, Belgium (tonnes and % share)
Source: EC, Market Access Data Base, https://madb.europa.eu/madb/statistical_form.htm Careful forward planning will be required in assessing the most appropriate routes to serving UK markets in the first weeks and months of 2021. Consideration may need to be given to the scope for using UK east coast or ‘inland’ ports to side-step traffic congestion in Kent, although this may require an alteration to the initial ports of landing in the EU27. It could also face handling constraints. While European traders are working flat out to ensure the continued smooth functioning of existing supply chains, for cut flowers a critical issue will be the distribution of the additional costs within the supply chain, given recessionary pressures will limit the scope for passing costs on to consumers. This is an issue which ACP exporters will need to pay close attention to in their negotiation of supply contracts for delivery in 2021. Attention of course will also need to be paid to the currency volatility issue, which has been described as a ‘hidden monster’ lurking on the shore of the Brexit end game. If supply contracts are negotiated in Euros, with payment being made at the end of the inter-continental flight, then ACP exporters can side-step both the currency issue and the additional border clearance costs and loses. If not, the additional logistical costs and potential losses arising from transport and border clearance delays will be compounded by any devaluation of the UK £ which may occur on the back of a no-deal UK departure. Alternatively, consideration may need to be given to finding new freight routes directly to the UK of seeking out alternative markets. Established South African exporters of specialist fruit, vegetables and cut flowers directly to the UK market have recognised that where direct air freight services are used, ‘complications’ in the movement of goods across EU-UK borders could open up new opportunities for ACP companies which are in a position to meet Brexit related product supply shortfalls on the UK market (8). However, for exporters which do not have established relationships for directly serving the UK market, Covid-19 related disruptions to both markets and passenger flight services for products such as cut flowers, could make it extremely difficult to make such adjustment in routes used for serving the UK market, This will be particularly the case if the UK remains in the grip of the Covid-19 pandemic in the first half of 2021. Looking beyond the ACP export trade, if disruptions to EU/UK trade in animal products are severe, the diversion of raw materials into the production of longer life products (skimmed milk powder (SMP) and butter in the dairy sector) could see an extended and dramatic expansion of both EU and UK exports of these products to 3rd country markets. For SMP and butter this could see EU companies looking to expand exports to African and Caribbean markets, while for poultry breast meat the EU could be looking for markets in the Caribbean and certain parts of Africa for breast meat exports. UK exporters meanwhile are likely to look for markets in Africa for poultry parts currently traded into eastern European EU markets. In the poultry meat sector, the extent of this trade diversion may be limited by a recession driven increase in demand for lower priced poultry meat. However, the scale of the potential EU/UK trade disruption in poultry meat (in excess of 1 million tonnes) is huge, relative to current extra-EU exports. ACP governments will need to prepare for dealing with these export surges, where this is likely to disrupt local production and regional trade (e.g. Namibian beef exports to Angola). However, where potential import surges would pose no threat to domestic production or regional trade, for import bills could be reduced by capitalising on the short-term surpluses which will be generated by EU/UK trade disruptions. |
Sources:
(1) The Grocer, ‘British firms may pause EU food exports to avoid traffic chaos in January’, 9 October 2020
https://www.thegrocer.co.uk/brexit/british-firms-may-pause-eu-food-exports-to-avoid-traffic-chaos-in-january
(2) Guardian, ‘Up to 2m lambs may go to waste under no-deal Brexit’, 9 October 2020
https://www.theguardian.com/politics/2020/oct/06/sheep-farmers-to-be-hit-hard-if-uk-leaves-without-brexit-deal
(3) thedairysite.com, ‘UKs meat export market at risk as government delays securing Third Country status’, 29 September 2020
http://www.thedairysite.com/news/55926/uks-meat-export-market-at-risk-as-government-delays-securing-third-country-status/
(4) BBC, ‘Shoppers could pay more after no-deal Brexit’, 24 September 2020
https://www.bbc.com/news/business-54287283
(5) FEPEX, ‘Competition from third countries in the UK in the event of a no-deal Brexit’, 27 October 2020
https://www.freshplaza.com/article/9262376/competition-from-third-countries-in-the-uk-in-the-event-of-a-no-deal-brexit/?edition=3
(6) Freshplaza.com, ‘Brexit is forcing businesses to look for other sales markets’, 23 October 2020
https://www.freshplaza.com/article/9261380/brexit-is-forcing-businesses-to-look-for-other-sales-markets/?edition=3
(7) The Grocer, ‘Currency is Brexit’s hidden monster, food and drink suppliers fear’, 23 October 2020
https://www.thegrocer.co.uk/brexit/currency-is-brexits-hidden-monster-food-and-drink-suppliers-fear/649663.article
(8) Freshplaza.com, ‘Most difficult air freight season ever – but Yukon International didn’t miss a week’, 27 Oct 2020
https://www.freshplaza.com/article/9262516/most-difficult-air-freight-season-ever-but-yukon-international-didn-t-miss-a-week/?edition=3