Scotch exports to old and new markets
Scotch whisky is big business for the United Kingdom and a favorite luxury spirit worldwide. It’s Britain’s largest food and agricultural export, having brought in $5.9 billion in export revenue in 2015. More than half of the world’s exported whiskies by value, which totaled $10.9 billion in 2015, were Scotch whisky, originating from one of Scotland’s roughly 115 distilleries.
Scotch found itself in an uncomfortable position in the Brexit debacle. In deeply pro-EU Scotland, the Scotch Whisky Association (SWA), the main industry body for the beverage, was publicly committed to the Remain camp. In February, the SWA released a statement stressing the importance of remaining in the EU, citing its single market, regulation of food and drink products, and unified trade policy as “central to Scotch Whisky's success.”
Indeed, the EU has been good to Scotch. The EU is the largest market for the spirit, receiving 30 to 40 percent of all Scotch exports every year. The strong export market is facilitated by free trade within the single market and strict labeling regulations that protect the integrity of the product. Scotch benefits from Protected Geographical Indication (PGI) status under EU law, one of three geographical protectionist labels that govern product labeling for specialty foods. The same laws protect the naming rights of products such as Champagne, Cognac, and Parmigiano-Reggiano.
Understandably, losing the EU’s single market and regulatory protection registered as a major blow to the Scotch industry. In a post-Brexit Europe, Scotch could be subject to import tariffs in the EU or lose the EU’s streamlined regulatory benefits—jeopardizing one-third of export revenue for an industry that exports more than 90 percent of what it produces. Forfeiting EU trade agreements with non-EU countries could jeopardize the other two-thirds of export revenue.
But this doomsday scenario may be too simplistic, obscuring potential Brexit benefits. For one, there is an almost-guaranteed short-term advantage to exports as the value of the British pound drops. Sterling has dropped close to 10 percent since the referendum, and analysts expect the low rates to stay, especially if other countries start dumping British pounds as a reserve currency. Meanwhile, it will likely take at least two years to finalize a UK-EU separation, during which time Scotch exports can enjoy all the same EU protections at more favorable exchange rates on the international market, a benefit that could go a long way toward reversing the four straight years of decline (in real terms) that Scotch exports experienced from 2011 to 2015.
Scotch consumers around the world will be delighted by the lower prices. In countries such as India, Taiwan, and Mexico, the three fastest growing Scotch export markets, many consumers are just entering into the global middle class where they can afford to purchase high-end foreign goods like Scotch. A drop in Scotch prices globally will mean a whole new slice of the world’s burgeoning middle class will be able to enjoy the beverage.
Looking beyond the initial fear of braving international trade without the strength of the EU, the Scotch industry may not fare badly in the long term either. One major concern the Remain camp had is that a standalone Britain would become subject to numerous tariffs, and while this may be true for various other goods, it doesn’t seem to be true for Scotch. Only three of the top 10 Scotch export destinations have tariffs for imported whiskies—Australia at 5 percent, South Korea at 20 percent, and India at 150 percent. It seems unlikely that, post-Brexit, the largest Scotch importers including the EU, the United States, Taiwan and Singapore, will suddenly impose tariffs on whiskies.
As for the EU’s free trade negotiations that the United Kingdom will lose, it is possible that Britain will be able to negotiate its own deals, and much more quickly than the EU. Take India, for instance. The country is the world’s largest consumer of whiskies, consuming 1.5 billion liters a year, more than three times the United States, which holds the number two spot. Despite its 150 percent import tariff, India is also the fastest growing Scotch importer. With disposable income growing rapidly in India, the potential for Scotch in India is enormous, and the SWA has flagged India as a top market priority.
Yet negotiations for an EU-India FTA, begun in 2007, are moving at a snail’s pace. EU FTAs have to be agreed on and ratified by all 27 (formerly 28) member states before they can pass, a process that can be extremely drawn out. On its own, Britain could potentially arrive at a deal much more quickly. Indian Scotch consumption, which shot up 23.6 percent per year on average from 2009 to 2014, could increase even faster if trade duties were removed, as this would mean an immediate 60 percent discount on Scotch for Indian consumers.
Singapore, too, will have a lot at stake. The tiny island city-state is the fourth largest importer of Scotch, which it then turns around and exports to much of the rest of Asia, especially China. As an Association of Southeast Asian Nations (ASEAN) member, Singapore benefits from preferential trade treatment with China through the China-ASEAN Free Trade Agreement (FTA). But if Britain is able to negotiate trade deals with China, it could bypass Singapore as a trade hub, delivering a serious blow to the small country, which exported more than $800 million in whiskies (all whiskies, not just Scotch) in 2015.
While Britain will most likely be subject to a number of new import tariffs once outside the EU, Scotch will likely be an exception. In spite of the SWA’s pro-EU position, it’s not a stretch to imagine that the Scotch industry would be better off after Brexit thanks to increased accessibility to rapidly growing markets such as India. Indeed, a strain of Brexiters did voice such arguments against red tape from Brussels. And in the case of Scotch, it is ironic that the Leave camp, allegedly for a more isolated Britain, seems to have much more at stake with free trade than Remain.
A sweet deal for the British sugar industry
Following the reform of its sugar industry in 2006, which Gro covered in a previous Insight, the European Union’s sugar trade has been turned on its head. After the World Trade Organization ruled that the EU was dumping sugar on the global market, production quotas, tariffs, import restrictions, and subsidy restructuring transformed the EU, the second largest consumer of sugar in the world, from one of the largest exporters of sugar to one of the largest importers. Furthermore, since the EU produces 43 percent of world’s sugar beets, its policies have also unequivocally favored sugar beet farmers and refiners. These policies have kept prices of both raw sugar beets and processed white sugar within the EU significantly higher than global sugar prices.
Producing on average 7.5 million tonnes annually and providing about half of all the sugar consumed in the UK, Britain has a strong sugar beet production capacity of its own. However, its sugar beet production is dwarfed by much larger EU producers like France and Germany which produce three to four times as much.
Given its colonial history with sugarcane producing regions, the UK also has a legacy of refining cane as well as beets. In fact, the country is one of the world’s largest importers of raw cane sugar. However, EU regulation has put in place rather draconian restrictions on sugarcane imports as a way of protecting its sugar beet industry. These policies have increasingly frustrated UK cane sugar refineries and restricted their production. Last year, Britain sugarcane imports amounted to just over half a million tonnes, but less than a decade ago in 2008, sugarcane imports to the United Kingdom topped 1.4 million tonnes.
Tate & Lyle Sugars, which operates Europe’s largest sugar refinery, has increasingly suffered under recent EU regulation that has inflated the cost of sugarcane. Imports from major sugarcane producers like Brazil and India are restricted with quotas and high tariffs. Meanwhile, product from ACP (Africa, Caribbean, and Pacific) countries, which can be imported duty-free according to EU law, is limited in supply because ACP countries simply don’t produce enough to meet the UK’s refining capacity. Raw sugar from ACP countries also isn’t produced efficiently enough have a price point on par with average global sugarcane prices. This results in UK purchasers paying an additional 150 euros per tonne for ACP sugarcane.
Already since Britain joined the EU, Tate & Lyle Sugars has shrunk from six refineries to one, and more recent policies have put production at the company’s single remaining refinery into a downward tailspin. In 2009 Tate & Lyle Sugars produced 1.1 million tonnes, but by 2012 that figure had fallen by almost half to around 600,000. In a recent letter to his staff, a Tate & Lyle Sugars executive wrote that in 2014, “EU restrictions and tariffs pushed … raw material costs up by nearly 40m euros (£31m) alone, turning what should have been a good profit … into a 25m euros loss.”
While the EU plans to remove sugar beet quotas in 2017, a UK government report has found that abolition of these quotas will not increase the profitability of cane refiners. In fact, sugarcane refiners are likely to suffer even more with the change. The quota termination will lead to an increase in supply of sugar beets, which will in turn lead European refined sugar production to increase. The price of sugar refineries’ output, therefore, i.e. refined white sugar, is expected to fall.
For beet refiners, this price drop will be mostly offset by falling prices of sugar beet inputs, keeping their profit margins intact. On the other hand, sugarcane refiners, who are supplied by foreign sugarcane growers, will not experience an equivalent drop in input prices, as there is no plan to change import restrictions. Since sugarcane refiners will still be hit with the same fall in product prices their profit margins will be squeezed.
So it comes as little surprise that UK sugarcane refiners were staunch supporters of Brexit. Decoupling from the European Union would allow for the creation of more personalized sugar trade policies for Britain. These would likely enable the United Kingdom to import additional sugarcane from more cost competitive countries where quotas and hefty tariffs had previously limited importation.
This change could spell good things for sugarcane growers as well, especially those in the developing world. Expanded European sugar production is expected to drive raw sugar prices down substantially and introduce increased volatility into the market. Thus, the abolition of sugar beet quotas in 2017 has LDCs (Least Developed Countries) extremely concerned that their sugarcane industries will not be able to compete.
Policies that encourage the commodity’s importation would help UK sugarcane refineries thrive, and if crafted well, they could also fuel a healthier sugarcane trade that would provide at least some relief to LDC producers. According to a report from the Fairtrade Foundation, the UK already accounts for more than 25 percent of the EU’s sugarcane imports from ACP and LDC countries. Furthermore, researchers from the UK’s Food Research Collaboration found that “the UK alone takes 100% of the EU exports of some cane producing nations,” such as Fiji, Belize, Laos, Cambodia, and Sudan in 2010.
While the opening up of the sugarcane trade could edge out these LDC producers by introducing even more competition, many sugarcane refiners, as well as the United Kingdom in general, place an importance on continued support of these markets, many of which are former colonies. For example, Tate & Lyle is currently the world’s largest contributor of Fairtrade premiums.
Most UK food producers will likely struggle in the face of an exit from the EU due to higher input costs and the absence of EU tariff benefits. But the silver lining is that a revision of sugar policy could result in lower domestic sugar prices and stimulate British exports of refined sugar. In the past decade, the cost of refined sugar in the EU has been at times nearly double that of global prices. While the gap has become less severe in more recent years, sugar costs have still remained artificially high and refined sugar exports from the UK have remained dampened. A UK parliament report found that wholesale sugar prices had been inflated by approximately 35%, while “EU consumers have suffered a 1% increase in the overall cost of the average food basket.”
Competition in cut flowers
As the fifth largest importer of cut flowers in the world, Britain’s decision to leave the EU will have innumerable consequences for countries that rely on the UK as their export destination. Kenya’s flower market, for example, expects to be shaken by the UK’s exit from the EU. Considering that Britain directly purchases 13 percent of Kenya’s flowers and many more indirectly through Dutch auction houses, there is concern over both the short- and long-term well-being of Kenyan floriculture.
The most certain damage to Kenyan floriculture is paradoxically caused by uncertainty itself. The Brexit decision has cast the economic future of Britain into the unknown. The unpredictable future caused a precipitous drop in the sterling pound against the US dollar, at one point falling to its lowest level since 1985. This decrease in purchasing power will decrease imports, in the near term, as they become more expensive for UK buyers. Additionally, major financial institutions like Goldman Sachs and the IMF are expecting a mild recession, in part due to a scale back in investments caused by the unknown future of the UK and its trading policies. Flower exporters to Britain will certainly be the first to feel these hard times as British consumers curb their consumption of luxury items.
New trade agreements lie at the heart of the long-term economic impact of the Brexit. While individual trade relations between Kenya and the United Kingdom are important, ultimately a UK-EU trade agreement will be paramount for the floriculture industry.
The Netherlands continues to dominate the fresh cut flower trade, holding a 52 percent share of all flowers and plants exported. The UK imports 80 percent of its flowers from the Netherlands, which is also the destination of 51 percent of Kenya’s flower exports. Therefore, the trade regulations and tariffs between the EU and the United Kingdom are similarly important for Kenyan flower exports. If Brexit leaders keep their promise and search elsewhere for favorable bilateral trade agreements, Colombia, Britain’s third largest source of flowers, could step in. Colombia’s ascent to becoming a more important exporter of flowers, would escalate competition for the UK market between South America and East Africa.
Colombia is poised to take advantage as it is already ahead of the growing trend of exporting flowers via container ships. Innovations in transportation that prevent damaging flowers en route and environmental concerns have led exporters to use cargo ships as a cheaper and more fuel-efficient alternative to airplanes. In 2013, Colombia exported 16 times more containers of flowers by ship to Europe than Kenya, with the majority of those containers destined for the UK. With its departure from the EU, Britain may lean more heavily on Colombia for cut flowers. However, in the event that exporting flowers from the Netherlands to the UK becomes more challenging, Kenya could also capitalize on the increasingly international floral market and directly ship more flowers to the United Kingdom as well.
A fragile industry, Kenyan floriculture will hope for an advantageous trade agreement that will allow for the quick and cheap exportation of flowers to the UK, while maintaining its duty free status with the rest of the EU. In many ways, the Brexit accelerates an ongoing trend of international trade that supplants the Netherlands as the traditional international flower hub.
Perhaps more imminent than changes in consumer habits in the coming years is the monthly loss of 4 billion Kenyan shillings ($40 million) that the industry will incur if the Kenyan government does not sign an Economic Partnership Agreement with the EU by October 1. The trade agreement between the East African Community (EAC) and the EU has now been complicated by the loss of the UK, a major destination for East African countries imports. Even if the trade agreement is still easily agreed upon, questions about how the UK will do business with East African countries remain. The already lackluster deal now solves fewer problems as developing countries can only guess as to what their trade relationships will be like with the United Kingdom.
The outcome of the Brexit vote was highly unexpected, and the United Kingdom will have a lot to sort out to successfully navigate a separation from the European Union. For better or worse, there will certainly be repercussions for industries worldwide.
For British Scotch producers, a worst case scenario has exports to the EU, their largest market, collapsing, while they also find themselves locked out of new EU trade deals with other countries. In a more optimistic scenario, Scotch exports will benefit from increased exports due to a depreciation in the pound and a nimbler government that will allow the UK to negotiate new trade agreements much more quickly. Emerging Scotch markets such as India and Mexico as well as trading hubs like Singapore will be watching closely.
Sugar processors in the UK could also benefit from escaping EU legislation that prevents them from accessing low cost raw sugar inputs. Small sugarcane producers ranked as Least Developed Countries, from which Britain imports a great deal of its raw sugar, could witness the UK market open up if UK sugar processors continue to buy from them, or shut suddenly if they look exclusively to lower-cost producers like Brazil and India.
Finally, major exporters of cut flowers such as Kenya and Colombia will be eyeing the European market as it readjusts. Much of EU flower imports go through the Netherlands, a trading hub, but less favorable trade arrangements between the EU and UK could mean producers will import to both markets independently. Shifting trade flows would open up a scramble to capture market share in a new landscape.
These three commodities are by no means comprehensive of the entire post-Brexit agricultural sector. But they do offer a glimpse at the far-reaching global impacts and the fight for market dominance that will come as trade deals change and supply chains shift.