In his latest ‘Brexit Challenge’ paper setting out the details of what leaving the European Union really means, Nick Clegg has turned to the pitfalls facing the UK’s food and drink industry:
Former Deputy Prime Minister Nick Clegg has warned that leaving the European single market would lead the UK “off a cliff towards higher food prices”.
He said items like chocolate, cheese and wine would be hit by a “triple whammy” of tariff checks, customs checks and workforce shortages. [BBC]
Here is what Nick Clegg had to say on launching his latest Brexit Challenge paper:
Today I am launching the third of a series of Brexit Challenge paper, on Food and Drink – everything from farming and fishing to high value-added foods made with imported ingredients. It is our biggest manufacturing sector by value, larger than car and aerospace manufacturing combined, and employs 850,000 people. And it is highly dependent on access to EU markets and to EU migrant labour.
Seen through this lens, Hard Brexit is not a sunny upland; it’s a cliff edge.
First, exporters. Food and drink products are currently traded across borders with no forms or checks. Once we leave the EU, products will have to go through customs checks at the EU border which include applying for relevant import licences, costly export health certificates to show that the product meets EU public health standards, and veterinary inspections. Major markets for key exports like whisky (which brings in £4bn a year) will become more challenging as tariff-free EU-negotiated FTAs fall away.
For farmers, the next few years are extremely worrying. Profit margins are already squeezed to the barest of minimums. Come 2019, farmers will face average tariffs on their wheat, milk, and other agriculture produce of 22.3%, and the following year they will most likely lose some of the £3bn in subsidies they currently receive from the EU. In the face of stiff opposition from abroad, the logical conclusion is that smaller operators will go out of business, while only the larger more industrial farms are likely to survive.
Manufacturers further up the food chain face the prospect of big price hikes in raw ingredients, both from domestic production and from the increased cost of imports once tariffs are applied. 70% of imported food comes from the continent.
Consumers will inevitably have to bear the knock-on cost of these pressures, while also seeing the price of imported foods rise, including popular products which we are accustomed to buying cheaply.
For example, Chilean wine faces a 14% tariff, while for New Zealand Lamb the additional cost for importers will be 40%, while chocolate and beef will face whopping tariffs of 38% and 59% respectively.
These are daunting tariffs for importers and for consumers, but the problems start well before Brexit actually takes place. The recent drop in the value of the pound and its impact on sales of Marmite and PG Tips is only a foretaste of what is to come in the next 12 months.
There are two problems. First, many importers and producers reliant on imported ingredients are currently hedged against currency fluctuations, but those hedges will start to expire soon, exposing them to the full effect of the weaker pound.
Secondly, supermarket suppliers are tied into long-term contracts, usually for 12 or 18 months. Producers who signed contacts before the devaluation of sterling are stuck with fixed supermarket prices, while the cost of their raw ingredients has risen sharply. One shortbread producer in Scotland recently warned that he risked going out of business due to a 75% rise in the cost of butter since June. When those supermarket contracts expire, suppliers will be able to negotiate at a higher price. Good news for them, but bad news for shoppers.
Of course we don’t exactly know what effect all of these factors will have on supermarket prices. As Ian Wright, the chair of the Food and Drink Federation said the other day, retailers only have three choices: either absorb the costs into their margins (which is difficult given the ultra-competitive nature of the supermarket industry); pass it onto consumers (similarly unattractive when discount supermarkets are nipping at your heels); or stop stocking certain products altogether. No wonder the Federation also found in a recent survey that close to 70% of their members are pessimistic about the future.
Price rises therefore seem inevitable. One study conducted for the National Farmers Union in April this year estimated that Hard Brexit would lead to average food price increases of around 8% by 2025. And in May this year the Treasury predicted that a fall in the value of sterling of 12% caused by uncertainty after a vote to leave would mean that a family of 4 would see their bills go up by £123 after 2 years. Given the fall in the value of sterling is now 17%, the final bill will surely be higher.
Tariffs and transaction costs are not the only concern though. EU rules govern every corner of food and drink, from hygiene standards to nutritional labelling, disease control to animal welfare. Consumer confidence in the quality and safety of our food hinges on these standards. All of these rules will therefore need to be brought into UK legislation and some of them will be hotly contested, with consumer groups and industry arguing about the correct balance.
The heavily EU-dependent food and drink industry really is the bellwether for a successful Brexit. If the government can’t get it right for them, then they won’t be able to get it right for other sectors.