John FitzGerald: Brexit prospects are bleak for beef producers
The UK is currently the largest single market for Irish exports of food and agricultural produce, accounting for some 40 per cent of all such trade. And while food now only accounts for 10 per cent of overall Irish goods exports, because of the high domestic value added, it matters to the wider economy.
All the studies on Brexit point to problems ahead for the Irish food and agriculture sectors. Even under the most favourable circumstances – where the UK remains in the EU customs union – food producers would still face challenges.
Under the least favourable outcome of a “hard” Brexit, the Irish food sector will be the hardest hit. World Trade Organisation rules would see tariffs of 50 per cent or more imposed on dairy produce and meat exported to the UK.
It’s also unclear what the effects of any divergence in UK food standards post-Brexit would be.
EU entry and the application of CAP to Ireland raised Irish farmers’ incomes by 80 per cent between 1971 and 1973. This reflected the fact that the EU market severely restricted imports from outside the EU of products which Irish farmers produced, guaranteeing high prices.
Even today, after significant opening up of the EU market, the beef prices our farmers receive are well above world levels.
The effects of Brexit, of whatever brand, will negatively affect Irish food exports in terms of both the price achieved and the volume of sales. These will be worse if tariffs are introduced, and will take some time to fully play out.
While pharmaceutical companies exporting to the UK have significant market power – the buyer has to pay whatever price they set for unique drugs – the same is not true for the food sector. Irish producers of beef and dairy produce face stiff competition in the UK so that they are effectively price-takers on that market. This means that they could take a big hit on their export prices to the UK if tariffs were imposed.
Even without tariffs increased competition for beef from outside the EU would seriously affect profitability. As the EU market price for meat is roughly 30 per cent above the world market price, if the UK price fell to the world level it would be a huge hit for Irish exporters.
Substantial investment in developing new markets will be needed
While beef exporters will try and find other markets within the EU, this will involve substantial investment in marketing; also, the EU price would be likely to fall. As the value added in meat processing is around 15 per cent of final sales, there is very little scope for meat processors to absorb such a big fall in price. Instead farmers are likely to see a very big reduction in the prices they get.
World market price
In the case of dairy produce, the situation is rather different. Currently the price that Irish farmers get for their milk is close to the world market price. If they could sell their milk directly on the world market they would be largely unaffected by Brexit. However, they depend on the dairy processing sector to get their produce to market.
As with meat processing, the value added in dairying is around 15 per cent of the final price. In this sector too much of the initial hit of a hard Brexit would fall back on farmers. However, with large Irish multinational players involved in processing, they will eventually reorganise the sector to access alternative world markets. This means that, in the long term, the milk price farmers receive would eventually return to world levels.
While we don’t know what type of Brexit the next year will bring, the food sector needs to adapt rapidly to the changing external environment.
In dairying this will require the development of alternative products aimed at other EU markets. For example, production needs to shift from cheddar cheese, sold in the UK, to alternatives that are in demand elsewhere in the EU.
In addition, substantial investment in developing new markets will be needed. The more rapidly the sector adapts by developing new products and new markets the better. It will shorten the period of pain for farmers. Enterprise Ireland is already working to facilitate this change.
However, for beef producers the prospects are bleaker. Beef production is already much less profitable than milk. As a result, policy needs to focus on helping farmers to move away from beef. If production shifted to biomass or forestry, there could be multiple benefits, including higher returns for farmers in the long term and a significant net reduction in emissions of greenhouse gases.