Analyst Insight: No-deal Brexit in the pre-pack sector

Friday, 18 October 2019

The pre-pack sector is the largest of the potato sectors in the UK. It accounted for around 38% of 2018 potato production in Great Britain. Although potatoes grown for the pre-pack market are grown nationwide the largest areas are normally in the East of England and Scotland.

The UK exports an average (2016/17-2018/19) of c.177Kt of fresh potatoes, excluding seed and starch, a season. The majority (97%) of fresh potato exports are into the EU and around a third of these are exported to Spain. While we don’t have exact figures, we know that most of these are pre-pack and chipping potatoes intended for the Canaries. A further proportion of UK fresh exports are chipping potatoes destined for the Republic of Ireland (read more here) and processing potatoes for factories in Belgium and the Netherlands.

The market sector that fresh exports will end up in changes depending on the domestic and European supply situation each season.  Last year for example, typical trade routes were boosted by opportunities to export packing potatoes to Poland and the Czech Republic.

The UK imports c.146Kt of fresh potatoes each year of which over 60% comes from EU destinations. With maincrop mainly coming from Belgium, the Netherlands and Irish Republic and new potatoes imported from Cyprus. The overwhelming majority of non-EU imports are new potatoes of Israeli origin ahead of the arrival of the domestic early crop.

Alice Bailey

Analyst

Barriers to trade

  • Non-tariff barriers – in the case of a no-deal, the UK would be unable to export fresh potatoes into the EU until the UK is granted third country equivalency. This is not the case for the Canary Islands which currently operate under a separate phytosanitary protocol (see below). A full explanation of non-tariff barriers can be found here.

  • Tariff barriers – once the phytosanitary issues are resolved maincrop potato exports will be subject to an 11.5% tariff, if no trade deal is in place. A full list of tariffs can be found here.

Day one impacts

If the UK leaves the EU without a deal, exports of fresh potatoes in any form will not be able to move into the EU. Export trade with the EU will cease until an agreement with Brussels is reached on phytosanitary regulations. The timeframe for this is unknown as negotiations will not be able to take place until after the UK leaves the EU. In terms of total packing production the affected volumes appear relatively small.

While the UK waits for third country equivalence to be granted, this supply will need to either be stored at a cost to the business, or be sold locally adding pressure to the domestic market.

For export focused businesses this is going to be a large hit. The lack of export opportunities into the EU means these exporters will require a healthy balance sheet to survive the initial period.

The recent growth in exports to Eastern Europe will also come to a halt with UK sellers unable to access what has been a good home for lower priced ware potatoes over the past year. The uncertainty is already having an impact on business. Industry reports say Polish supermarket chain Bierdronka is no longer stocking UK potatoes from the 15th of October with forward export sales cancelled as a result.

Trade should be able to continue with the Canaries as they have their own phytosanitary regulator which is not governed by the EU. It is uncertain if there will be a tariff change on these shipments but any changes will have to be absorbed into the supply chain or passed onto customers. Causing further concerns is the collapse of Thomas Cook. With lower tourist numbers, demand for foodservice potatoes in the Canaries is likely to be reduced this season.

Longer term

Once an agreement is made regarding the phytosanitary requirements and trade resumes, the focus will be on tariffs.

Based on current levels, and assuming that a trade deal isn’t in place, an 11.5% tariff will apply to all fresh exports to the EU. This additional cost is unlikely to be fully passed onto customers in these price sensitive markets. Instead farm gate prices for export potatoes are likely to come under pressure to remain competitive abroad.

Imports from the EU will not be impacted by any tariffs and from outside the EU tariffs will remain unchanged. While border friction will add some cost to imported supplies, it is unlikely to be a significant enough rise to change purchasing behaviour.

As with many sectors, a reliance on European labour within packhouses could also cause further disruption moving forward.



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