Professor Gerry Boyle:

Teagasc very much appreciates the opportunity to speak to the committee on the issue of the withdrawal of the United Kingdom from the European Union. Naturally, our contribution will focus on the agriculture and food sector. Unsurprisingly, our overall view is that the best outcome from the perspective of the Irish agriculture and food sector would involve as little change as possible to the current nature of trading and relationships among Ireland, the European Union and the United Kingdom. I refer members to our presentation handout. I will talk them very briefly through a few key points. A great deal of the information on the initial assessment of the impact of Brexit, or at least what has been referred to as a "hard Brexit", is well known at this stage. I will focus on a couple of aspects which are perhaps not as well appreciated.

The key issues include the trade impact which is the dominant economic impact, but I also wish to focus on some issues related to North-South agri-supply chains. Teagasc is also of the view that there is a potential negative impact on the Common Agricultural Policy budget. The final issue I intend to address is what will be required to enable Irish companies to diversify from the UK market to the greatest extent possible and what we consider that process will involve. Teagasc and colleagues in the Department of Agriculture, Food and the Marine and our sister agencies attached to that Department have organised a very significant response to the Brexit challenge by establishing a dedicated unit to monitor continuously developments in that regard. We have also established a working group across the entire organisation comprising colleagues in various research areas, including processing research and our advisory service nationally. We hope, with our colleagues in the Department, to be in a position to respond to issues as they emerge.

As the situation pre and post-Brexit is well known at this stage, I will not spend too much time on it. Pre-Brexit, we enjoy as a member state of the European Union a situation vis-à-visthe United Kingdom in which regulatory frameworks are identical and no customs procedures apply to trade. No tariffs are levied on trade. Post-Brexit, a known unknown, there is the possibility that regulatory frameworks will diverge. That is a concern which will add to the cost of trade. If the United Kingdom moves outside the customs union, there will be clear additional costs in the processing and administration of customs requirements. Of course, the major potential impact is the imposition of tariffs on trade with the United Kingdom, as well as third country competition for Irish products in the UK market. These are well known issues. A variety of analyses have been conducted by colleagues in Teagasc, led by Dr. Hanrahan, to quantify the impact of different Brexit scenarios. In simple terms, the impact of a hard Brexit boils down to the potential tariffs that could be levied on Irish imports into the United Kingdom.

In simple terms, the impact of a hard Brexit boils down to the potential tariffs that could be levied on Irish imports into the UK. We have tried to simplify, in the bar chart members have before them, the complex potential tariff arrangement that would be in place in the event of the World Trade Organisation, WTO, tariffs applying, for example, if there was no deal. Clearly, this is at the outer extreme of possibilities. Members can see from that chart that the beef sector would be substantially hit with an average tariff of the order of 70% in that scenario, the dairy sector would be hit by an average tariff of 50% and it goes down along the various foods that are imported into the UK. This is a very complex matrix of tariffs. A total of 2,500 tariff lines exist in regard to trade between Ireland and the UK. This is an attempt to provide an overview but the impact of such tariffs is obvious. One would not need complicated economic analysis to determine that faced with those kinds of tariffs, the competitiveness of Irish products in the UK would be affected to a catastrophic degree. If Britain decided to revert to the traditional cheap food policy and allow imports from third countries, that would add further to the competitiveness threat. Broadly, the impact on trade with the UK generally is pretty well known, at least as far as an extreme hard Brexit scenario is concerned.

We have become concerned recently about the implication of a hard Brexit for the agrifood trade North and South. We have extracted some data for 2016 which illustrates the potential impact at a micro level. There has not been sufficient appreciation of the disruption that could be caused to local supply chains, particularly those close to the Border. Members can see that in the dark green line on the chart we have exports to Northern Ireland in 2016 and the lighter green line, with the negative numbers, indicates the imports from Northern Ireland. There is a good deal of information given there but I want to single out three trade flows that are very significant. The first one to draw to the members' attention is the substantial imports of dairy produce from Northern Ireland into the Republic. A total of 80% of these products are raw milk for further processing in the south of Ireland. If that supply chain is disrupted, it will have severe implications for these supply chain flows.

I would also draw members' attention to the imports of animal foodstuffs, which is very important in a local context. The port of Derry is the dominant source for importation for most of the northern region of the country. Members can note there are substantial flows of product. It is evident that any disruption to that supply chain would have very serious consequences for agricultural sector in the South.

I would also draw members' attention to live animal exports to Northern Ireland. Most of the other exports are in the form of processed goods and of course they will be affected. The reason I draw their attention to live animal exports is that many sectors on the Border depend substantially, for the processing of their product, on factories in Northern Ireland. One sector that comes to mind is the pig industry, which is concentrated in the Border regions. We would be very concerned about it in the event of a so-called hard Brexit. These local factors have not been brought into the public domain to date, at least not in a formal way.

We have attempted to bring together the impact of tariffs and the potential impact of, what we call, a hole in the CAP budget should the British withdraw from the CAP, as would be expected post-Brexit, and, most importantly, this hole would not be compensated by other member states. We hypothesise that the hole could have of the order of 10% of a negative impact on the budget. If we bring that CAP effect together with a tariff effect, that will have a huge impact on farm incomes. These are indicative estimates and we call them static effects in the sense that they do not take account of what one would expect in the longer run, namely, that producers would respond to these changes and adjust their activities but, nonetheless, it gives an order of the magnitude involved. Members will see from looking across the bottom of the chart they we have the various systems of production in the Republic in the dairy sector, cattle fattening, sheep and tillage sectors and that what we call the policy shock, which is Brexit, will cause an impact on tariffs but it will also affect prices. By bringing the two together in the blue line on the chart, members can see that our estimate is that the reduction in incomes - this would be a permanent reduction which would not be compensated - would be of the order of 35% in the cattle sector and of the order of 20% in the remaining sectors. In a nutshell, that represents what might be termed the extreme competitiveness shock we could face.

I draw members' attention to the last slide. It is not possible to capture the complexity of this slide without having the animations on, but I will do my best. We in Teagasc believe that we must focus on how we can minimise this shock. Clearly, our view is that we need to focus, as never before, on developing the innovation capacity of our farmers and especially of our food companies. Everyone talks about market diversification and there will have to be more diversification but there is not a full appreciation of what is involved in it. It will require all the organs of the State - Enterprise Ireland, Bord Bia and so forth - to identify routes to market and so on but it will also involve and require a substantial investment in developing innovation capability within our food companies and within support services in the research and development area.

We believe there are opportunities that we can exploit. There is a number of technologies that I would like to summarise that we can exploit and that we need to do that in the next few years through a determined strategy to enable diversification to be realised. For example, we need to work on extending the shelf life of products for faraway markets. There is huge scope in the dairy sector for further fractionation and the addition of value to milk. Country of origin labelling will be very important as will the deployment of leading analytical capabilities to support food companies in new markets and in developing existing markets. In particular, we would draw attention to one area that needs a great deal of work, particularly as far as the Asian and Chinese markets are concerned, that of understanding the sensory requirements of consumers in these markets.

I have just come back from a very illuminating trip to China. Teagasc is very concerned about the cheddar market in the UK, on foot of Brexit, because 65% of our cheddar exports go to that country. British people like cheddar, and not every other country appreciates the exceptional quality of this product. So far, Chinese consumers have not really embraced cheese at all. From our point of view, that is a challenge to be overcome. Extensive sensory analysis of Chinese consumers in situwill be required so we can identify what type of cheese products will be attractive to them. It is a growing market. Similarly, there is huge potential for growth in south-east Asia. We have to do a great deal of work to penetrate such markets.

I would like to speak about the development of smart ingredients in recent years. Senators will be aware that infant formula is a big component of our overseas market at the moment. The unique features of the Irish production system ensure that there is quality and that the products are produced in a sustainable manner from the perspective of animal welfare. We need to develop smart technologies that enable us to penetrate those markets. The success of Ornua's investment in the Saudi market over recent years is an example of this. The extraordinary nature of the product that is used in the production of labneh cheese is probably not fully appreciated. An ingredient that is shipped in powder form from Ireland is reconstituted as a soft cheese in the Saudi factory. That is based on Teagasc technology. That is an example of what I mean when I talk about innovation. There are many other opportunities for potential innovation that we need to exploit quickly.

If I was to leave the Chairman with one message, it would be that although we are facing a definite competitiveness shock, even in the most benign scenario, we must bear in mind that opportunities are available to us to minimise that shock, at the very least. That boils down to a commitment to continually innovate in support of Irish companies. I have mentioned the Chinese market on a couple of occasions because it is very important. Teagasc is in the process of developing a laboratory in the University of Fujian in China to support Irish-based companies in the Chinese market. More initiatives of this nature are needed if we are to ensure the market diversification opportunities that exist in China are fully exploited.