Brexit on the menu: no deal would be devastating for Scotland’s food and drink sector and cost billions

Written by Jenni Davidson on 13 February 2019 in Inside Politics

While the food and drink sector has been preparing for Brexit, no deal threatens the viability of businesses across Scotland

From a warehouse on the southern edge of Edinburgh, Juan Andrés Santelices runs a small business selling organic, fairtrade chocolate to shops in the UK and Ireland and online across the EU.

Pacari is multi-award-winning chocolate brand that supports farmers in Ecuador with a fair price, but like many small food businesses, it is being threatened on a number of fronts by Brexit.

“From day one, it has affected us, Santelices tells Holyrood.

“First, from a big drop from the 23 June that year [2016] in terms of the crash of the pound, which made all our imports by then already more expensive.

“We couldn’t transfer those changes in prices to consumers because then we would be out of the market, so we had to assume those losses in the first place.

“So that limited growth and the potential of expansion.

“Then in these two and half years after that, we haven’t been able to prepare anything.

“We don’t know if we are going to be in a kind of single market or not, if we are going to go with WTO tariffs or not, for how long if not, nothing.

“If we are going to have to replace paperwork which we use to import, which are EU paperwork, with equivalent British ones, but no one has shown us anything.”

The Pacari agents across the EU keep shipping costs down by ordering from Ecuador together. Between them they fill a shipping container, which is split in Rotterdam and the pallets delivered onwards to the UK, Denmark, Spain, Italy, France and Germany.

But it is unclear whether Santelices will be able to do that after 29 March.

“If we go without a deal, can we do that anymore? If yes, how? But what are my extra costs?

“Because we are going to be outside the single market so we will be treated in Rotterdam differently.

“What sort of paperwork am I going to need then and there to take my products out?” he asks.

And it is not only shipping costs that may go up under a no-deal Brexit, but tariffs too, because the EU has a free trade agreement with Ecuador, but the UK does not.

“What happens if those import duties go 10, 20 per cent higher, 25 per cent, then who is going to absorb that?” asks Santelices.

“Is the government going to put in place a subsidy for us as businesses to support that, or are they saying, well, your problem, when it wasn’t.

“In Scotland, people and businesses didn’t vote for this.”

And once he gets the chocolate into the UK, he may also lose a large part of his current market.

In the event of a no deal, it is unlikely he will be able to continue to supply Ireland from the UK, and the 35-40 per cent of customers in his online shop who are from other parts of the EU are likely to transfer their business to another supplier within the bloc.

Santelices says: “It’s very easy for [Boris] Johnson and others to say, we’re going to build the internal market in the UK.

“Well, so far, the internal market I have in my online shop in the UK has a size, and around 35-40 per cent hasn’t come from the UK.

“So even if I grow another 35, 40 per cent in UK business, if we go out [of the EU], it’s only going to replace what I’m losing rather than a growth of an extra 35, 40 per cent.

“And really, it’s not only upsetting, it’s frustrating, it’s sad[ness], anger, all these feelings together.

“You send emails to these generic departments of [the UK Government] asking, they never come back.

“So what are we going to do? It’s not a cloud on the horizon, it’s a storm coming.

“[That’s] how we can see it today as a small enterprise. No support. No clarifications. Nothing.”

And this is just one example of the effects on one business.

James Withers, chief executive of Scotland Food and Drink, does not mince his words when he refers to the no-deal scenario for the food and drink sector as “unmitigated bad news”.

“It will be a disaster and it will cost us billions,” he says.

A no-deal Brexit is predicted to cost the Scottish food and drink sector £2.2bn, quite a substantial amount when you consider that it is currently worth £14bn in total.

Moreover, the Scottish Government and the food and drink industry have a joint target of doubling that to £30bn by 2030, an increase of five per cent a year, but there is no question a no-deal Brexit would knock that into reverse.

Withers warns that there will be both short and long-term effects of a no-deal Brexit, but that even apparently short-term disruption, such as the current uncertainty and possible temporary delays to shipments due to queues at ports, could have a permanent impact.

While the potential long-term impact of tariffs on various food producers could mean that they are permanently excluded from foreign markets because they are no longer competitive on price, anything that makes products temporarily unpredictable or unavailable could cause buyers to find a new supplier from elsewhere.

Wither explains: “If we’re talking to some of our EU buyers at the moment, for a number of our products, they cannot commit to contracts that go beyond 50 or 60 days because they don’t know if there’s going to be a big tax that’s going to land on that product.

“So if you’re buying Scotch lamb just now, it could be 50 per cent more expensive on 30 March.

“If you are buying Scottish seafood just now, it could be 15 per cent more expensive.

“So that part of the uncertainty is these people who are buying up need to be able to commit to buying that product, whether it is food to go on restaurant tables or supermarket shelves, and the fear is that this uncertainty means that these buyers go elsewhere because they have to secure their supply.

“So I think there’s already, irrespective of what happens now, Brexit has already done damage, and it’s absolutely done damage to the cashflow of a lot of businesses, who are having to buy in, stockpile more products now, for those that are bringing ingredients in, so whatever happens, and the fact that we’re so close to Brexit D-day without a deal has already done damage to the industry.”

Around 70 per cent of Scottish food exports go to the European Union, £1.2bn out of £1.6bn, along with £1bn of the £4.4bn whisky export industry, so it is “hugely important”, says Withers.

There are different threats to various parts of the food and drink sector, and plans are being put together for each of them to try to find solutions.

For seafood, Scotland’s biggest food export, the key concern is not the tariffs but the disruption and delays to freight routes, such that alternative freight routes and even alternative markets are having to be considered.

It’s also about “trying to get our heads round what will be a huge bureaucratic requirement if we face a no deal” because there will be multiple new certificates that have to go with products and they will cost a lot of money, says Withers.

Even if a deal is done, there will still be a lot of extra paperwork.

One sector that is particularly under threat from a no-deal Brexit is Scotch lamb, where currently a quarter of the product is exported to the EU and tariffs could be 50 per cent or more.

Withers likens the potential impact of no deal to foot and mouth disease in 2001 and suggests it “could actually close that market”.

“Scotch beef and Scotch lamb have really valued customers in Europe, Europe loves the product, the French love the product, [but] the tariffs will just make that product uncompetitive in the marketplace.

“So then what you’re looking at is either trying to absorb that in the home market, which will definitely be an option for beef, but for lamb, that really looks unlikely.

“You know, we could have 25 per cent of our lamb this year which has no home to go to and that’s pretty devastating stuff.”

Jonnie Hall, policy officer with NFUS, warns that hill farming is particularly vulnerable and with Brexit already affecting farmers, he is very keen that the replacement for CAP is put in place quickly and it takes account of the unique challenges for Scotland.

“We do everything in Scotland from soft fruits to potatoes to dairy to cereals, right through to beef and lamb and all the rest of it, but the biggest sectors are the beef and lamb sectors and an awful lot of that stems from the uplands and the hills, where you’ve got fewer and fewer farming opportunities and therefore, the options are limited and yet the physical and financial pressures of farming in those sort of areas are very, very significant indeed.

“And therefore, the upland beef and sheep farmer in particular is the most exposed by the whole Brexit process, in two ways.

“First of all, the red meat sector is probably the most vulnerable in terms of crashing out of the EU in terms of trade and being exposed to cheaper products from other parts of the world, for example, South American beef or maybe lamb from New Zealand, or whatever it might be.

“And that’s one side of it. And the other side of it is our uplands are marginal, at best, when it comes to making a financial return.

“Therefore, those farms and crofts tend to be the most heavily dependent on support payments to keep them in existence and therefore, we need to put in place a package of support which enables them to continue.

“Because it’s not just about food production, it’s about maintaining people in the countryside, keeping people in remoter areas, keeping the lights on in the glen, to use that expression, and everything that goes with that, because farmers and crofters, at the end of the day by grazing our uplands, are looking after our environment, but they’re sustaining local communities and the economy as well.

“So it is vitally important that we secure a better and more prosperous and more certain future for our hills and uplands in particular.”

While the whisky industry was less concerned about Brexit than some others, it will be a different story with a no-deal outcome.

Although it will not face tariffs going into the EU, unlike many food exports, no deal might see it being charged tariffs for markets outside the EU where there was a trade deal through the EU costing the industry up to £50m.

Withers adds: “But we’ve talked to distilleries who are also stockpiling as well, so extra casks from Spain, they’re bringing in extra corks from Portugal, some of them get yeast from France, so whilst the whisky industry is absolutely better placed to withstand a no-deal Brexit, it will still have a huge impact on them and is something that they absolutely want to be avoided.”

For some businesses, Brexit might actually offer the possibility of expansion due to less imported goods.

“There is that potential,” says Withers. “For fruit and vegetables, that’s looking a lot less likely because we’re so seasonal, so actually, we’d be almost at the peak of some of our imports round about March-April time, just as we could be heading for a Brexit.

“And a lot of Scottish businesses, Scottish vegetable producers, Scottish fruit producers, their business is also based on importing product from the likes of Spain, so that’s part of their business model, they import it during low season for Scottish crops and then they don’t when it’s high season, so they will, for sure, be impacted.

“For other sectors, if you take the dairy sector, the UK’s been a net importer of dairy products for a long, long time, so if it’s harder for dairy imports to come in, there absolutely will be opportunities for dairy companies in Scotland to take advantage of that.

“But the overall message is that the strongest industries are those that have a good spread of markets and don’t just rely on their home market.

“Our home market is critical to us. We sell three pounds of food in the UK for every one that we sell overseas, but we need to build on that spread of markets and that export base and the reality is that Brexit, and a no-deal Brexit, will significantly knock us back.”

Withers adds that the “absolutely critical thing” is tariff-free access.

“We cannot afford to have tariffs landed on us.

“And the reality is in the no-deal scenario, if we end up with tariffs, it will dramatically reduce our business in our biggest export market, at the same time as potentially the UK Government lowers tariffs for imports coming in, we’ll end up with something of a perfect storm.

“We’ve already got products we can’t find a market for and additional products potentially flooding in because the government wants to keep food prices down.”

All this uncertainty may have an effect on the sector, but where does it leave the Scottish Government’s wider aspirations of creating a good food nation by 2025?

Following a commitment in the 2017 Programme for Government, the Scottish Government launched a consultation in December on a good food nation bill.

The bill, as proposed, would require Scottish ministers to set out a policy on food covering areas such as food production, waste and accessibility to nutritious food.

Meanwhile, legislation to make access to food a legal right has been set aside to be included in wider poverty-related human rights legislation.

Separately, the Scottish Government’s Good Food Nation Programme of Measures, published in September 2018, covers a much wider range of non-statutory actions that are already being carried out or are planned towards creating a ‘good food nation’, bringing together food production, the environment, public health and food poverty. 

They cover everything from increasing exports of Scottish food and drink to tackling Scotland’s bad diet and an endemic obesity problem that contributes to so many preventable diseases, teaching children about food provenance through more visits to farms and school cookery lessons, alcohol pricing, and reducing food poverty and the use of foodbanks through the Fair Food Fund.

The Good Food Nation Programme of Measures acknowledges that Brexit will have an impact on its aims, but says it intends to “minimise disruption”.

It says: “But there is no avoiding the fact that circumstances have changed since we set out our vision to be a good food nation in 2014.

“While we cannot allow the uncertainty caused by Brexit to curtail our ambitions or halt Scotland’s progress, we also cannot ignore its potential disruption in key areas like the sustainability, quality and availability of good food.”

However, Brexit poses some serious challenges for this, with its potential for food shortages.

The UK is only 60 per cent self-sufficient for food, and while Hall suggests we are unlikely to actually run out of food, the threat of food shortages could push up food prices, forcing the government to intervene and drop import duties on food imports, which in turn could threaten Scotland’s domestic market, particularly for higher quality products such as Scotch beef and lamb, at a very vulnerable time for producers.

This will make for some tough choices in food and drink policies in the months to come.

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