Direct Brexit impact on sheepmeat more significant than other sectors – Rabobank

The direct trade impacts of Brexit on New Zealand’s agricultural sector are likely to be relatively contained, but for sheepmeat direct export exposure is more significant, Rabobank says in its June Agribusiness Monthly report released today.

The global agribusiness banking specialist says with the United Kingdom and the EU-27 nowadays only contributing a relatively small share of New Zealand food and agricultural (F&A) exports – 4.3 per cent and 8.8 per cent respectively by value – the direct trade implications of the UK’s historic decision to leave the European Union would be limited for the agricultural sector as a whole.

However, the report notes, for some sectors – particularly sheepmeat, wool, fruit and wine – the direct export exposure is more significant. Rabobank senior analyst Marc Soccio says these sectors in particular would be exposed to any sustained negative impact Brexit had on the UK economy and household incomes, as well as price inflation due to adverse currency moves. “These sectors, in addition to beef and dairy, are also the more significant New Zealand exports to the EU-27,” he says.
UK and EU-27 share of NZ food and agribusiness exports, 2015

According to him the EU, including the UK, was New Zealand’s most important export market for sheepmeat by ‘both volume and value’. “In 2015, approximately 46 percent of New Zealand’s sheepmeat exports by value went to the EU in total, while of this, close to 20 percent went to the UK,” he says.

As well as being a big importer of sheepmeat, the UK is also a significant exporter of sheepmeat into the EU, tariff free, the report says.

“If this was to change, there may be more product remaining in the UK market which could result in high supplies and less demand for New Zealand sheepmeat,” Soccio notes.

For New Zealand’s wine sector, he says the UK had long been a major export market by volume, taking one-quarter of all wine volume exported by New Zealand to the world. “While the trade terms on which New Zealand exports wine to the UK will remain unchanged in the near term, any negative shock to the UK economy or sustained devaluation of the British pound would adversely affect the affordability of wine in the UK,” he said.

For dairy, the report says, any weakening of the euro resulting from the Brexit decision would help to stall the building of dairy inventory levels, but also place further pressure on international milk prices by increasing the international competitiveness of European dairy products.

The report says the implications of Brexit on both market access and UK food prices would need to be watched in the future.

Marc Soccio, Rabobank.
Marc Soccio, Rabobank senior analyst.

“It remains to be seen how trade tariffs, duties and quotas may change between the UK and the EU-27 and how elimination from the Common Agriculture Policy (CAP) impacts UK food producers. Any imposition of trade barriers and reduction in producer subsidies would act to raise the cost of food sourced domestically and from the EU-27,” he says.

“A depressed British pound would also inflate food prices in the short term. In the longer term, high food prices may be alleviated through free trade agreements beyond the EU.”

Looking at the broader economy, the report says volatility in financial markets naturally raises concerns over any longer-term spill over into the real economy around the world, coming at a time of heightened tension in financial markets and fragile global economic growth.

“The British pound has plunged, and the flight to safety by investors has pushed the US dollar and Japanese yen sharply higher against a large basket of currencies, including the New Zealand dollar,” Soccio says. “In the near term, investor risk sentiment will remain the predominant driver of currency market movements and heightened volatility is to be expected, with some risk of increased intervention by policy makers in currency markets.

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