September 28,  2020

Arla: Urgent need for Brexit deal to avoid disruption and food price hikes

A new report from the London School of Economics (LSE), commissioned by leading dairy co-operative Arla Foods, has concluded that without practical action by the UK government and the European Union, the food sector and consumers on both sides will be badly impacted after the Brexit transition period ends.

However, there are ways that the United Kingdom and EU can work together to minimise disruption after January 1, 2021.

The Vulnerabilities of Supply Chains Post-Brexit report, which has been produced by LSE Consulting's Trade Policy Hub, outlines just how interlinked the food sectors in the UK and EU are. At present, a total of 40% of agricultural and food products consumed by households and businesses in the UK are imported from the EU. In the dairy sector, 15% of all products sold are imported into the UK, and 99% of this currently comes from the EU.

A 'no-deal' departure, with high tariffs, will hike up the prices of many products. Even with a deal, non-tariff barriers such as increased paperwork and customs checks will have a major impact, increasing prices and reducing product availability. These changes will flow back through the supply chain and affect EU food producers and processors. The report also finds that countries like Denmark, Spain, Netherlands, Belgium, France, Italy, Greece, Cyprus and Ireland are all estimated to see a fall in food exports to the UK.

According to the report, the impact of a no-deal Brexit will disproportionally affect the food and beverage sector, seeing average tariffs rise from 0% to 17.7% for EU exports to the UK, which is more than four times in comparison to other sectors.

"Arla Foods has consistently advocated for as free a trade as possible once the UK leaves the EU. This is the best outcome for the European food and beverage sector - including dairy. There is a risk that in a no-deal scenario, the UK market for EU dairy will be significantly impacted," said Peter Giørtz-Carlsen, Arla Foods' EVP of Europe and member of the co-op's executive board.

However, EU consumers will also feel the impact. The report finds that average prices for UK branded products imported into the EU will increase by 27.9% under a no-deal scenario and unbranded UK products to the EU will increase by 13.2%.

This issue is not limited to products on supermarket shelves but also affects agricultural production. Major inputs into the production and manufacturing of food will also be affected. 69% of some aluminium products, 65% of certain pharmaceutical goods and 51% of many fertilisers are imported to the UK from the EU. These products are likely to become more expensive due to additional costs from tariffs and non-tariff barriers.

The report makes clear that a way out of this situation is still in reach. A trade deal for food and drink would deliver major benefits to UK and EU consumers. Even if a deal is reached, the EU and UK should avoid the creation of new non-tariff barriers and custom requirements, particularly for perishable goods.

"This report shows how integrated the UK-EU food supply chain is and the mutual benefits both sides get from this. Because of this free trade, UK and EU consumers have access to a large choice of high quality, affordable products. We want to ensure this continues after December 31, 2020 and we know consumers expect this as well. But for this to happen, it is essential we secure a tariff-free agreement. And it is vital too that the UK government, EU and member states take pragmatic and sensible steps to limit the impact of non-tariff barriers," said Giørtz-Carlsen.

"Tariffs imposed on food and drink are typically very high, so the impacts of a no-deal Brexit will inevitably have profound effects on customer choice. Even with risk management strategies in place, no-deal will have significant impact on the fresh foods sector and these need to be considered by policy-makers in the coming weeks,"said Dr. Elitsa Garnizova, one of the authors of the report.

The report also takes a longer-term perspective, showing that whatever deal is done and whatever steps are taken, flows of food and drink products to and from the UK and EU are set to change significantly over the coming years.

The report highlights that, while long term strategies of market and product diversification may help the food industry rebalance, in the short term, there is a risk of oversupply in the EU of products normally exported to the UK such as beef, sheep, pigs and dairy.

The report calls for the UK and EU to take a strategic approach, working across the value chain to address challenges and harness opportunities that arise to ensure that farmers, consumers and the food industry benefit from what happens once the UK is fully out of the EU.

- Arla