The most complex environment I have ever seen

Transcription

1 2016/17 The most complex environment I have ever seen Many factors are in play. On returning from the Sial food show a chief executive of a large multi-national food company stated how complex the current environment is and said that in his business lifetime he had not seen it quite so challenging. Often we are prone to see today s challenges as larger than ones we have seen before, however, this market update refers to the following key drivers: Foreign Exchange Supply Fundamentals TRQ management systems / Brexit together for brevity! We put them in no particular order. Foreign Exchange In essence, we have seen an externally-managed devaluation of the pound against both Eurozone and US currencies. This has resulted in many graphs being passed across negotiating tables in the food industry over the past few weeks, so here are ours: Graph 1: GBP : USD ($) 12 month exchange rates USD ($) (Xe.com, 2016)

2 Graph 2: GBP : EUR ( ) 12 month exchange rates EUR ( ) (Xe.com, 2016) EFFP s Agri-Food Outlook paper for Shore Capital refers to the inflationary dragon stirring in part due to foreign exchange rates (EFFP.com, 2015), more on which later. What we can say is that against a trade weighted basket of currencies sterling has experienced a fall of c15% and against the US dollar and Euro c8-12%.

3 Interestingly, the Goldman Sachs economics research department published a summary, which highlights how political uncertainty impacts upon sterling devaluation over the past 100 years (Goldman Sachs, 2016). Brexit Historically, the graph shows, that periods of substantial currency weakness have been associated with a rise in economic and political uncertainty suggesting that Brexit certainly qualifies as an uncertain time. (Goldman Sachs, 2016)

4 This same research paper also warns of further sterling weakness specifically against USD ($) suggesting that the overall cumulative depreciation in USD:GBP could be as much as 25% by year end, significant given that the UK imports 40% of its annual foodstuffs (IMTA-UK.org, 2016) and crude oil, key in transport and packaging is priced in USD($). Supply Fundamentals The end of food price stagnation Whilst it is hard to see beyond currency in the supply equation we are seeing other evidence of the inflation dragon stirring. We do not believe that we are in a move as drastic as that of 2008 but it is definitely a change from the overall bearish market since 2012, which has caused in part four consecutive good grain harvests, a collapse in oil prices, a weakening Chinese economy and a dairy ban to Russia. Recent examples of a reverse in the trend for commodities include: 12% increase in vegetable oil prices v 12 months ago Sugar prices up 75% Dairy prices increased by 14% year on year Crude oil up from $30 per barrel in January 2016 to $45 per barrel 38% increase in Soya prices from February 2016 September % increase in Wheat prices from February 2016 September 2016 The overall effect of this is a move to overall food market inflation as shown by the graphs below The graph above shows the sharp increase in soya prices over the past 8 months. (Lloyds Animal Feeds, 2016)

5 To sum up, these effects have combined to provide what must be an inflationary effect on food. EFFP Retail Price inflation Forecast (EFFP.com, 2016)

6 TRQ Management / Brexit We combine these as they both relate to how either we currently trade with the rest of the world and how we will trade in the future. Perhaps best to take the former first. Non-EU imports are managed through specific trade mechanics some of which are quota controlled. Third country poultry imports subsequently travel under two pieces of legislation 616/2007 and 1385/2007 (Gov.UK, 2016). Both these (and other) documents are currently in the fourth stage of Brussels rewriting with the objective of simplifying and harmonising these mechanics whilst reducing their ability to be abused. These changes are as yet unconfirmed but are likely to come into force in June This in itself is fine. However, we are told that article 50 will be actioned by March 2017 giving a likely leaving date of April Therefore we are operating under a potentially changing piece of legislation which we need to comply with, although we may well have other arrangements in place by that time. This impending change has seen a flurry of position/opinion/planning papers being written, a selection of which are mentioned below with links to originals or website. National Farmers Union Impact of exit from the EU British Poultry Council (BPC) - Management Brexit Paper British Egg Brexit egg data International Meat Trades Association (IMTA) Overview of UK Current Meat Import and Export Trade The conclusion to all this is that we are likely to experience a period of volatility as short terms shocks (e.g voting out) work their way through and long term trends (e.g increased chicken consumption per head) impact the markets. Whilst the real winners here may be printers of these papers,the bottom line is that all parties cannot agree. In fact in many instances there is direct opposition. A pre Brexit NFU paper highlighted the following facts (nfuonline.com, 2016) 60% of food and drink exports go to the EU This is worth 11bn Renegotiating deals outside of the EU could take 10 years with no guarantee of a better deal Food and drink is the UK s largest manufacturing industry employing 400,000 people The UK leads the way in animal welfare This document was designed to persuade people to vote remain but highlights the tension which will exist between this and the fact that the UK would run out of chicken in August of a calendar year if it did not import in the meantime we all need to keep our customers happy and supplied with quality, consistent and sensibly priced products.

7 Meadow Vale is part of an Agri food group with UK, EU and third country supply chains. Recently accredited a BRC standard Agents & Brokers certificate, this provides us with essential certification for providing purchase, importation or product distribution services in the food and/or packaging supply chain. Our values within the business remain focused on our people, our customers and our markets. We pride ourselves on our market knowledge within our chosen sectors and seek to work in a collaborative manner, developing sustainable, long-term relationships for mutual benefit. We invest in ensuring robust supply chains, consistently delivering security, integrity and providing industry leading quality 52 weeks of the year. We have been committed to offering high standards and building quality relationships for the last 27 years and will continue to do so in the future. References Goldman Sachs, (2016). How Much More Sterling Downside? Xe.com. (2016). XE Currency Converter - Live Rates. [Online] Available at: [Accessed 28 Oct. 2016]. Effp.com. (2016). OUR VIEW. [Online] Available at: [Accessed 28 Oct. 2016]. Imta-uk.org. (2016). International Meat Trade Association. [Online] Available at: [Accessed 28 Oct. 2016]. Indexmundi.com. (2016). Rapeseed Oil - Monthly Price - Commodity Prices - Price Charts, Data, and News - IndexMundi. [online] Available at: indexmundi.com/commodities/?commodity=rapeseed-oil&months=12 [Accessed 28 Oct. 2016]. Gov.uk, (2016). Poultry Meat- Leaflet ET7. Brussels: European Court of Justice. NFU Online. (2016). Home NFU farming news Agriculture Livestock Crops Poultry. [Online] Available at: [Accessed 28 Oct. 2016]. Britisheggindustrycouncil.co.uk. (2016). BEIC. [Online] Available at: [Accessed 28 Oct. 2016]. Britishpoultry.org.uk. (2016). The British Poultry Council. [Online] Available at: [Accessed 28 Oct. 2016]. Building better business. Together telephone visit