Chairman:

We are now in public session. I welcome our witnesses today to discuss the impact on the Irish agriculture, food and fisheries sectors of the UK referendum on membership of the European Union. I remind members and witnesses and persons in the Public Gallery to please turn off their mobile phones for the duration of the meeting.

I welcome Mr. Trevor Donnellan and Dr. Kevin Hanrahan from Teagasc to discuss the likely impact of Brexit, with particular emphasis on the Irish agrifood and fisheries sectors. The committee is aware of Teagasc's report entitled Brexit - the Potential Implications for Irish Agri-Food Sector, published in April 2016, a copy of which has been circulated to members.

Before we begin, I draw witnesses' attention to the fact that witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the Chairman to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him or her identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I understand that both witnesses will make an opening statement. I invite Dr. Hanrahan to make his contribution.

Dr. Kevin Hanrahan:

My name is Kevin Hanrahan. My colleague, Trevor Donnellan, and I are from the agriculture, economics and farm surveys department in Teagasc. We thank the committee for the invitation to discuss the implications of the UK's decision to leave the European Union. Our contribution will be on the agrifood sector. We will not address the fisheries sector as it is outside the remit of Teagasc. The decision by the UK to leave the European Union will present challenges for the Irish agrifood industries, given the importance of the UK as an export market. As members are aware, the precise implications of Brexit for the Irish agrifood sector will depend on a range of issues that will be the subject of negotiations, not only between the UK and the EU but also between Ireland and its EU partners. In this opening statement we would like to briefly outline Teagasc's actions in advance of, and since, the UK referendum in June 2016.

At the start of this year we considered that the risk of Brexit was high and we therefore produced an analysis of possible implications for Ireland's agrifood trade. Teagasc, in conjunction with the Department of Agriculture, Food and the Marine, organised a seminar on the possible implications of Brexit for the Irish agrifood industry, which took place in April 2016 in advance of the Brexit referendum. This conference was attended by more than 100 stakeholders from across the agrifood industry and society. There were speakers from Teagasc, the Department of Agriculture, Food and the Marine, the ESRI and respondents from the agrifood industry.

Teagasc's contribution to the seminar represented preliminary research on the possible impact of Brexit on the agrifood trade between Ireland and the UK. Specifically, it examined the possible impact of Brexit on the value of Irish agrifood exports. This paper, as the Chairman has noted, has been provided to members. Since the referendum result we have also published a short paper on the choices to be made by the UK with regard to designing its future agricultural policy once it has left the European Union. The design of UK agricultural policy will have implications for the future shape of the UK agrifood sector. In turn this will influence the UK's future import food requirements and therefore has knock-on consequences for export opportunities for Irish agriculture and food industries.

Other actions taken by Teagasc include participation in the Department of Agriculture, Food and the Marine's consultative committee on Brexit. Teagasc also has created an internal working group on the Brexit issue. While it is not possible to specify the final impact of Brexit at this time, it is possible to set out the issues that would affect the agrifood sector that may need to be addressed. It is also possible to specify desirable and less desirable outcomes that could arise with these issues. By identifying these issues and the preferred outcomes, Teagasc seeks to provide the Government with an agenda for negotiation in Brussels. We can identify five key policy areas of concern to the Irish agrifood sector, although it should be noted that there are many other concerns that will also need to be addressed.

The key issues are tariff and non-tariff barriers to trade between Ireland and the UK; the future of the EU budget and the CAP given the funding deficit created by the UK's departure from the European Union, whenever that happens; the capacity of the agri-food sector on the island of Ireland to continue to function as a single entity, particularly in terms of trade in agri-food raw materials and food ingredients; future decisions on the design of the UK’s agricultural policy; and future decisions on the UK’s trade relations with countries outside the EU.

Since the referendum result in June 2016, there has been much speculation about how the UK exit from the EU will proceed. At this stage we do not know exactly when the UK will trigger Article 50, how long the exit process will take, or what sort of trade relationship the UK will have with the EU. High levels of uncertainty are associated with most of the issues that arise from the UK’s stated intention to leave the European Union. This uncertainty, along with expectations that UK economic growth will be slower over the medium term as a result of Brexit, has been reflected in a significant fall in the value of the pound sterling against the euro. The immediate short-term impact of the Brexit decision has therefore already been felt by Irish agri-food exporters with business in the UK. The fall in the value of sterling has made it more difficult for Irish exporters to profitably fulfil contracts with UK customers that are denominated in sterling.

It should be noted, however, that this exchange rate impact is just a part of the challenge that Brexit may present for the Irish agri-food sector. Once Article 50 is triggered, the UK will remain an EU member for at least two years and possibly longer. This means that no immediate change in access to the UK market will arise. However, in the medium to longer term, once the UK has actually left the European Union, any change to the nature of the trading relationship between the UK and the EU will become more important.

Tariff and non-tariff trade barriers between the UK and the EU would present critical challenges but would not take effect until the UK has actually left the European Union. Whether the UK and the EU forgo the option of a free trade agreement is therefore a key concern, since a free trade agreement, depending on its nature, could potentially limit the impact of Brexit on the Irish agri-food sector.

Teagasc is committed to undertaking objective economic analysis for Government, industry stakeholders and wider society, detailing the impact of potential policy developments, including Brexit, on the Irish agri-food sector. As greater clarity emerges on the negotiation framework that will shape future UK-EU trade relationship, we will continue to provide Irish policy makers with timely and relevant analysis of the consequences of possible policy options.

I thank the committee for the invitation to come along and we are happy to answer questions.

Chairman:

I thank Dr. Hanrahan. As a committee, we intend to do a body of work on this issue. Teagasc is the first stakeholder group we will have before us between now and Christmas. Thereafter we will have all the stakeholders involved in the agri-food sector to discuss this important issue. Teagasc is first up, if I could put it that way. We will have Senator Mac Lochlainn, Deputy Pringle and Deputy Penrose first.

Pádraig Mac Lochlainn (Sinn Fein)
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We have Teagasc's excellent report from earlier this year. Another area of concern is the language that has been coming from what will be the new Trump administration in the United States in terms of trade. Has Teagasc done any analysis on the impact on prices if Britain was to engage with the United States, Canada and other international players directly? I see it referred to but I am interested in detailed analysis.

The questions I will ask might need a crystal ball to answer so I apologise in advance. The report is from April this year and the situation is changing all the time. The other issue is sterling, which has recovered a little bit since it hit the one euro to 90 pence sterling rate. It has fallen back. There are people in Britain saying it will fall back further as time moves on. Does Teagasc have any sense of that? Again, it is a crystal ball question.

The all-island dimension is one of the five key points Dr. Hanrahan referred to. Will he elaborate on the all-island implications? As a Donegal man, I am very concerned about that. Will Dr. Hanrahan speak on those points?

Thomas Pringle (Donegal, Independent)
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I thank the witnesses from Teagasc for their presence here. I apologise that I had to step out for a minute at the start. We are crystal ball gazing for everything in terms of how things will develop. It is very hard to get any definitive answers. In the paper from April, Teagasc modelled four separate scenarios. A worst case scenario was a cost of €800 million a year for the agri-food industry and the best case scenario was €150 million. Has Teagasc revisited those models recently? Has there been any significant change in the predictions based on the currency fluctuations and what is happening in the UK with Brexit and how it will develop? Will Dr. Hanrahan elaborate on what the best case scenario of €150 million actually means?

One of the key things if there are significant impacts on agri-food exports to the UK is to develop new markets. That sounds as if it will not be simple. It will not happen quickly or easily. Does Teagasc advise agri-food businesses to start working now on developing alternative markets? We had witnesses from the mushroom industry here a while back talking about how 90% of the industry's production goes to the UK market. How feasible is it for them to develop other mainland EU markets, for example France, which is the next closest? Is it feasible and is it something businesses should be looking at now? It probably makes sense to have a more diverse market rather than being in the situation of some sole suppliers. Some multiples ask people to be sole suppliers to them and then shut them down once they get them into that position. Everything else is guess work at this stage. Will Dr. Hanrahan expand on those two points?

Willie Penrose (Longford-Westmeath, Labour)
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We are asking the witnesses to prognosticate in a vacuum, which is very unfair. I smile to myself when I hear everybody talk about how we should have this or that done. How can one do anything in anticipation of what might transpire when Article 50 has not been triggered yet? If one takes the Greenland scenario, one would think it will take far more than two years to unravel the multitude of trade agreements and stuff that is transposed from EU law and embedded in UK law. Would the witnesses agree that two years is a very optimistic scenario and that it is more likely for it to go on for five years? That is my strong view. In that context, the UK will not have gone away from the EU. There will still be some trade until it definitively pulls out. The impact of that will be uncertainty. Will the witnesses give some view of the level of uncertainty? We will lose free trade with 65 million people. Is it the position that we are dealing with guesstimates in respect of potential negative impacts on volume and value? That is the important thing - volume and value. One of them will be impacted by the level of sterling and how weak it becomes.

I would like the witnesses to address a simple issue. I will be fair to them as economists, because I did some economic training and I know the "on the one hand, on the other hand" scenario drives everyone mad. There is never a middle scenario. Britain contributed £12 billion to the EU budget. Will that not be the most dramatic impact? Is it not the most tangible and the one which economists can immediately evaluate? What will be the impact of that on Ireland, particularly in the context of Ireland being heavily dependent on the more than €1 billion it gets?

Could the witnesses address this as something tangible to which we can get a reasonable reply?

Dr. Kevin Hanrahan:

Senator Pádraig Mac Lochlainn asked about the potential for the UK to engage in free trade agreements with the US and Canada. We have not done any more detailed modelling on the potential of what it might cause. For most of our careers, we have been involved in modelling trade integration agreements, such as a World Trade Organisation, WTO, agreement or the transatlantic trade and investment partnership, TTIP. Now, we are examining disintegrating potentials or the impact of FTAs between the UK and others. We have not done any detailed analysis yet. We are waiting for more clarity to emerge about what will happen in terms of the trade rules.

If the UK were to reach FTAs with the US and countries such as Canada quickly, and if there were no barriers between the UK and such suppliers, we could expect UK prices to decrease. Given the continued importance of the UK market for Irish agriculture, we could expect Irish prices to fall as a result. The magnitude of the fall would depend on many factors and we have no detailed analysis of how large it would be. However, it would almost certainly be a negative for Irish agricultural prices and, as a result, agricultural incomes. This just presents a downside for the Irish agrifood sector.

Mr. Trevor Donnellan:

We need to get our crystal ball out regarding what will happen to sterling in the next while. It has come back a little. We do not have any greater expertise than anyone else in the room to predict whether it will improve or otherwise. When we talk to people in the industry, there is a huge difference between sterling being at 90 pence to the euro and at 85 pence to the euro regarding entering a loss-making situation. The fact that sterling has recovered a little is most certainly good news from the perspective of exporters who have a high level of exposure to the UK. This part of it is good at least. Could the Deputy clarify his question on the all-island dimension?

Pádraig Mac Lochlainn (Sinn Fein)
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The third of the five key points is the capacity of the agrifood sector on the island of Ireland. Could we have more detail on it?

Mr. Trevor Donnellan:

There are two dimensions to it. We have a level of trade in terms of finished agricultural products with both Northern Ireland and the UK. The market for Irish agrifood in Northern Ireland is important. What is more critical is the integration of businesses north and south of the Border. Fore example, there is a significant volume of trade in live animals between the North and the Republic and vice versa, predominantly for slaughter. A large volume of milk comes from Northern Ireland into the Republic to be processed. This creates problems on both sides of the Border regarding what happens if, suddenly, the movement of milk or live animals is impeded.

What will happen to the milk the Northern Irish farmers are producing? Approximately one third of the milk produced in Northern Ireland comes South of the Border to be processed. Northern Ireland farmers would potentially need more milk processing facilities in place to deal with it. It seems problematic for the Republic to continue to take this milk, given that there is no way of segregating it and saying it is produced in Northern Ireland and is non-EU milk. From talking to the industry, this seems to be a difficult issue.

There is a problem with live animals, given that there is only so much slaughter capacity and if animals cannot cross the Border, there may be an issue of whether additional slaughtering capacity will need to be put in place to address it. In the poultry sector, all the hatchlings in the country are produced in Northern Ireland and come South of the Border to be grown. There is a very high level of integration regarding agricultural raw materials and food ingredients. Given that we have an all-island agrifood sector, the implications of Brexit are negative.

Dr. Kevin Hanrahan:

Those implications are forced a little bit on vets regarding product licensing on either side of the Border. Vets on either side of the Border might be using similar products. However, as licensing arrangements diverge between Ireland and the UK, some of those day to day decisions which vets and farmers make will be impacted in ways we cannot foresee. Things they do currently without thinking about them will no longer be possible.

Deputy Thomas Pringle asked whether we had revisited the analysis, and it is clear that we have not yet done so. We are still in a fog regarding what the UK will be seeking and what the EU will be willing or unwilling to give. Our opening statement commits us to being ready to do this analysis once we get a tiny bit more clarity on what the possible scenarios are. It is an infinite set of possibilities and we could be employed forever trying to do them. We want to start to do the ones that are most politically likely, given that this is where the interest will fall.

The numbers provided in the report, in terms of the magnitude of the trade destruction we are looking at if the UK exited, are based largely on similar work the ESRI did for the Department of Finance, which was based on work done by US economists Hufbauer and Schott. It used a gravity model of trade and examined the extent to which being a member of the EU leads members to trade more with one another than with non-members. Economists examined it in terms of trade in all merchandise, non-agricultural merchandise and agricultural merchandise. They did the latter analysis given that tariff barriers to trade in agricultural products are still much higher than in non-agricultural manufacturing goods. They found the impact of membership of the EU across all merchandise trade was approximately 21%. All things being equal, trade was 21% higher if one was a member of the EU. We and our colleagues in the ESRI use the estimate as a proxy for what would be destroyed if one left the EU.

The analysis also examined trade in agricultural merchandise and non-agricutural merchandise, given that they are different in terms of how tariffs work. The proportional impact the American economists found for agricultural trade was very large, over 50%. Would this level of destruction arise if the UK left the EU in terms of the trade relationships between Ireland and the UK? These are the dimensions we examined in terms of what led us to the €150 million versus the €800 million in addition to trying to think about the fact that if we cannot ship our beef or cheese or whatever to the UK, it will not disappear but will find an alternative market. We asked to what extent we need to change the price to get into those markets. As the Deputy rightly pointed out, getting a new market for Irish cheddar is not easy. If it were easy, we would already be in there. Often, it is sensible to assume that to get the market one would have to accept a lower price point, but how much lower? We have no hard evidence on how much lower the price would have to be, given that this has never happened before.

We use two very blunt assumptions. The product would not just disappear and we would still be creating the beef and cheese, and what we were not shipping to the UK would find another market, but at a lower price. We have two price points, namely minus 15% and minus 30%. Those four key assumptions are what creates the range of impacts in the paper between €150 million and €800 million.

By my guess, the finding that Irish agrifood trade with the UK would fall by 50% is too large because many other factors drive that trade. For example, we are nearest neighbours, we have similar cultures and culinary preferences and there is a high degree of integration between the agrifood industries on both sides of the water and North and South. There are many reasons to expect that, even after Brexit, Irish-UK agrifood trade will continue to be important. It will not shrink by half, although it will probably shrink in value, if not also volume, over time.

Developing new markets is not Teagasc's remit, but Bord Bia's. I have been present for statements by Bord Bia where it was actively helping the agrifood sector to develop new markets.

Does Mr. Donnellan wish to take Deputy Penrose's questions?

Mr. Trevor Donnellan:

Regarding new markets, some products with a large proportion going into the UK are mushrooms, as the Deputy mentioned, cheese and timber. Mushrooms and timber are low-value and bulky products that are not easily shipped long distances at a low cost. The feasibility of developing new markets for some of these will be challenging. Dr. Hanrahan mentioned cheddar cheese. It is a specific product for which there is not really a market on continental Europe. We would probably need to consider making different types of cheese. We already do to some degree, but the cheddar market in the UK is an important one for the Irish dairy sector because it is a retail-type market selling cheese that is directly purchased and consumed by customers as opposed to being sold as a cheese ingredient, for example, to a company that makes pizzas, which is what one might have to do to continue being involved in the cheese market.

There has been a general trend in Ireland anyway towards trying to reduce dependency on the UK market. Brexit might accelerate that. Growth areas for food products internationally are mainly outside the EU. The EU is a fairly mature market in which there is not much population growth and its consumers' preferences are shifting away from some of the products that Ireland produces. Beef is an example. Demand for it across Europe is not particularly strong, whereas demand outside of the EU is probably better. Regardless of Brexit, the Government may have a role in this regard by funding marketing initiatives in order to develop Ireland's non-EU markets, but Brexit probably increases the importance of doing that.

Deputy Penrose asked about the timeline. We agree with him. A companion set of slides goes with the report, although I do not know whether it has been made available to the committee. We can provide it in due course. Although it was speculation on our part in advance of the Brexit vote, we considered at the time that it could take up to a decade for the UK to untangle itself from the EU. That view has been expressed in recent weeks by some others. Two years is extremely ambitious. That period has only been mentioned because it is mentioned in Article 50. Many would say that that clause was written without the expectation that it would ever have to be used. It is a complex issue. Perhaps some of those involved in the negotiations have not yet realised quite how complex it is. Five years might not be an unrealistic timescale to have in mind.

The Deputy also asked about the UK's contribution to the EU budget. That budget was probably under pressure even before Brexit arrived on the scene. In the recessionary period of recent years, member states have been re-evaluating what they are getting out of the EU. Their willingness to increase their contributions to the overall EU budget was probably already limited.

With the UK leaving, the immediate question for the EU is whether it will operate with a smaller overall EU budget or member states will be asked to increase their contributions. That is a question to which we do not know the answer as this point. If one were to guess, one might suspect that member states would not be willing to increase their contributions because there would immediately be a large squabble about who should provide more money.

The CAP accounts for 42% or 43% of the total EU budget, which is a large share. There is pressure to reduce that share. If the EU budget gets smaller, there is pressure to reduce the share of it that is represented by the CAP and there are further pressures within the EU to try to equalise to a greater degree the amount of money that is going to various member states on a per hectare basis or whatever measure one chooses, one must conclude that Ireland's share of the CAP may come under pressure.

Alternatively, what if member states can be convinced to increase their contributions so that the EU budget remains more or less the same and the missing €10 billion is made up by them? That would leave Ireland in a difficult situation. On the one hand, it might find itself increasing its contribution to the EU budget and, on the other, wondering how much it will get back. The main mechanism by which Ireland gets funding from the EU budget is the CAP. As we move to being a net contributor, we could find ourselves trying to maintain the amount of money that is coming to Ireland through the CAP while contributing more to the EU budget than we are getting back. It is a tricky issue that may need to be played out in future.

Dr. Kevin Hanrahan:

All other member states are considering this calculus as well. Countries like the Netherlands and Germany are seen as the paymasters of the EU. They are getting rebates on the rebates that the UK gets in the budget because of the CAP. They will not get those rebates if the UK is no longer a member state and getting its rebate. This points to the difficulty in getting people to put their hands in their pockets to fill the gap created by the UK's exit, which looks likely to happen just as the new multi-annual financial framework is coming into being. It will be an interesting few years in terms of the budgetary process, never mind the agricultural dimension specifically.

Chairman:

Deputy Cahill, Senator Lombard and Deputy McConalogue are next.

Jackie Cahill (Tipperary, Fianna Fail)
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We are all focused on the fall in the value of sterling, but it is one of our least problematic issues. Companies and people who selling into the UK market will, when renewing contracts, allow for that fall.

Food inflation in the United Kingdom is increasing. Those in the mushroom sector tell us they are getting price increases from retailers. Has Teagasc done any analysis of whether food inflation is increasing in the UK and, if so, what effect it will have on consumer demand in future?

Free trade is a two-way street. The UK will want to maintain free trade. It exports a great deal of lambs to France. Those involved will want to keep that trade going. For over a generation we have stopped the UK doing trade deals with South American countries. What impact would it have on the beef industry if any deal was done? Can we spancel the UK in such a way that if those involved want free trade in Europe, they cannot do bilateral deals with South American countries?

I read a report this morning that set out how 20 countries within the EU had tried to bring in legislation to control retailers. The report gave an indication of the power of large retailers. Over a certain period the UK liquid milk market has been wrecked. Proportionally, almost 50% of UK milk goes to the liquid market there. As we sit here this evening, the price of on-the-spot milk in the UK is at 43 pence per litre. It looks as if there will be a serious shortage of fresh milk and cream in the United Kingdom in the run-up to Christmas. Over a long period, retailers in the UK have forced the primary producer into a position whereby it no longer makes economic sense to produce a year-round product.

We are focusing on alternative markets. However, 50% of our beef goes into the UK and approximately 42% or 43% of our dairy produce goes there. We need to be realistic. Under the Food Wise 2025 plan, we are projected to increase our production of milk, beef and so on. It will be difficult enough to get markets for that extra produce, never mind trying to find an alternative market for the product we sell to the UK. We saw the results of the Russian ban and the unease it brought to the market. It is difficult to imagine how we could reduce our dependency on the UK by more than 4%, 5% or 10% over a decade. It would represent a major target to try to reduce our dependence over a decade. There are 65 million or 70 million people in the UK. That will always be our main market. We have to factor that into our thinking. The suggestion that we can get alternative markets for the produce we sell there amounts to living in fantasy land. We will have to try to tailor any fall-out from the British decision to ensure that the economic effects are kept to a minimum.

CAP funding has been raised. Again, we need to face reality in this regard. If the budget is increased for CAP funding, or even if the budget is maintained, our proportion will drop. Eastern Europe will have its claws into the funding. Those involved will be able to make a stronger case for any extra funding that we could. We must face reality. In any economic projections we have to factor in that CAP funding to this country will be reduced as a percentage of the overall EU budget. Unfortunately, that is the stark reality as we face into the next CAP reform, which is only two or three years away. The year 2020 is only down the road. Numerous challenges will arise.

As other speakers have suggested, we are looking into a crystal ball. Food inflation will be present in the UK. The effect of this on demand will be crucial. The produce we sell will be on fragile ice with regard to the market equilibrium. I am keen to see some analysis of this. If food inflation is 4% or 5% in the UK, what effect will it have on demand for produce there?

Tim Lombard (Fine Gael)
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I am keen to follow the same train of thought as Deputy Cahill with regard to food inflation. During the week the chief executive of Tesco said that food inflation in the UK would be a major issue for next year because of sterling. The UK consumer will be significantly affected by Brexit. They will be paying more for product. That will be a key factor in where we go as a country. The UK is one of our main markets and this will be a key factor in how we supply UK consumers. I am keen to hear the thoughts of the Teagasc officials on how they intend to model the market in future. In many ways, the consumer in the UK will be grossly affected by Brexit. Food inflation will affect them more than us. I am interested to learn how Teagasc will model the arguments in this regard and how the market can benefit.

We need to consider the entire picture. Food prices and markets are important. Another major issue is CAP. For us, CAP is a major point. We are starting the next iteration of CAP reform in the coming months. The way we, as a nation, can deal with this will be crucial. The thought of having a cut in CAP in this market or in this area at the moment is frightening. That aspect has not really come to the forefront before today. Not only could Irish farmers have an issue regarding markets, there could be knock-on effects because of the cut in the European budget. That will be significant. The coming years will be rocky.

I come from Cork, which is a long way from the Border. However, cross-Border production is vital, especially when it comes to milk, pork and beef production. It is difficult to envisage a scenario of regulating building or manufacturing on both sides of the Border within two years. To me, it simply cannot be done. I cannot imagine how Lakeland Dairies or other companies could manage to process milk on both sides of the Border to the necessary degree in a matter of a few months. A five year plan is probably the only logical way. Whether it is logical in the context of Brexit is another issue. We are going to see exactly what will happen.

Charlie McConalogue (Donegal, Fianna Fail)
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I thank Dr. Hanrahan and Mr. Donnellan for their comprehensive presentations. Many of the points have been covered well. Teagasc produced a thorough report in advance of Brexit. The report outlined the potential implications. Apart from the decision to leave, we are no further forward in terms of the implications than we were in April. The worst-case scenario in the report projected that agrifood exports could potentially drop by €800 million per year or 8%.

Structural issues and tariff issues will arise in terms of how things pan out. One thing we know thus far is that as a result of Brexit the issues of currency and the major currency switch or adjustment will be significant. This is potentially concerning. The impact could be structural rather than periodic, as has been the case in the past.

Has Teagasc undertaken any assessment in terms of the impact on agricultural trade between Ireland and the UK up to now? I saw reports this week on beef exports for the back end of the year. The report referred to a 13% reduction in volume of beef exported in one particular month - I am unsure whether that was September or October. That is significant. They may be issues with regard to supply in the UK which feeds in to those figures. What is the Teagasc assessment? How much evidence and information does Teagasc have thus far on the currency impact of Brexit?

Chairman:

I am reminded that Nick Clegg, MP, the former UK deputy Prime Minister, made reference recently to a study. It referred to the fact that food prices could increase by 8% by 2025 in Great Britain. What are your views on those figures? I realise we are crystal gazing to a large extent. At this stage are there more positives than negatives or more negatives than positives for Irish agriculture in future?

Dr. Kevin Hanrahan:

I will address the questions on food inflation first. In all the economic analyses undertaken here and in the UK on the impact of Brexit, the losers include the UK consumer. Higher prices will reduce the purchasing power of the pound in their pockets. Consequently, their real income will be reduced.

If we believe the chairman of Tesco, who probably has much more control over prices than we have, food inflation of 4% or 5% in the UK, even if it is passed back to Irish agrifood industries and on to farmers, will not compensate for the magnitude of the depreciation in sterling that we have seen this year compared to last year. That is assuming the currencies do not more towards parity from their current differentials. For Irish suppliers, some increase at the retail level and in the food industry in the UK in the sterling prices they offer would be beneficial because it would allow the euro equivalent to increase a little, but it will not, in any major way, offset the impact. It might mitigate it but we will not see a return to the euro prices we had prior to Brexit and which we might have expected if Brexit has not happened.

Free trade is a two way street. Regarding Deputy Cahill's question on whether we can spancel the UK's relationships with non-EU countries, the UK can choose to do that if it agrees to be part of the customs union with the European Union but all the signals, and they are only that from the UK, are that it is not willing to give up its desire to have control over immigration and other issues and the question of whether it would contribute to the European Union budget would be the quid pro quofor doing that. One of the arguments of those in favour of Brexit was that they wanted to take control. Agreeing to limit their freedom to negotiate trade agreements with non-EU member states was one of the powers they were seeking to get their hands on, so I do not believe it is likely that we will be able to do that.

On the issue of retailer power, about which a number of members asked, while a number of member states of the EU were introducing legislation on this, any action at EU level that might happen once the UK is out of the EU would be irrelevant to the UK. As long as we are very reliant on the UK as a market, particularly its retail industry, if there are predatory practices in that industry, and we have no evidence that there are but that does not mean that does not happen, we will carry some of the consequences of that type of behaviour.

Mr. Trevor Donnellan:

Deputy Lombard asked how we would view the food inflation issue in the UK and Deputy Cahill asked about the effect it might have on the demand for food. We have colleagues in Northern Ireland, who do similar work to us, who have models for the United Kingdom. Our intention would be to collaborate with them to examine issues such as that one. That is one we will be capable of examining. I agree with the member's remark about the timeline involved in constructing new processing facilities. That could not be achieved in a short timeline of two years. To plan, commission and construct a plant would involve a longer timeline. The great uncertainty about that is whether it would be needed. There is still the question of what the relationship between the UK and Ireland and the wider EU will be and whether that would be necessitated. That is a challenging issue in itself.

On the question of whether we have yet seen the impact of the sterling reduction, that is difficult to say. The committee probably needs to interrogate the food industry on that, as we are not in the food industry. There are few issues involved. One is the forward contract arrangements that might have been in place. We do not know the detail, or what the duration, of those might be. Another issue is the hedging arrangements these processors might have had in place. In other words, they may have in the short term at least addressed the risk of the sterling depreciation. Eventually they will have to do new hedging arrangements which will be at exchange rates which are much closer to where we are at present and then we will see the real impact on the processing industry of the sterling reduction.

Another factor to bear in mind is the type of agrifood sector there is in the UK. As well as producing its own primary products, it imports quite a lot of primary products and converts them into finished food products for consumption in the UK and in Ireland as well. Another factor to bear in mind is changes in the value of primary products in percentage terms. In other words, the higher prices they might have to pay in the UK for basic raw materials might not transfer into the same percentage change in the finished product. There is also the range of other cost items in the production of a food product. Therefore, the type of percentage changes we might see in raw materials might be much higher than the type of percentage changes we might see in the finished product at a retail level, which is an important distinction.

The type of inflation in the short term, as was mentioned, is in the range of 5%. Some people have been talking about that in a relatively short-term period. Over the longer term, I am not sure we can say anything about the level of food inflation we will see in the UK. Traditionally, the UK has pursued a relatively low cost food policy. Rampant inflation in food at retail level in the UK would be hugely politically unpopular. We need to keep in mind that if UK policy was leading to very high food inflation, at some point governments would need to revisit the basis for that food inflation. I do not imagine the UK population would tolerate high levels of food inflation over the long term.

Dr. Kevin Hanrahan:

To follow up on that, one of the reasons the UK probably would seek to have free trade agreements with non-EU countries is to mitigate that risk of higher food inflation. On the point Senator Lombard raised about the coming together of this dynamic of the Brexit outcome and the negative impact of that for the agrifood sector, with the CAP and an EU budget dynamic, that is also negative. I believe that is very real. People are very well aware of that both in government and industry. It is hard to see how it is anything but a big negative for the terms of trade Irish farming is facing in the medium to longer term. It will accentuate some of the pressures on the agrifood sector that are already being felt. In the continuum of exposure to both these types of dynamics, there are parts of the industry that are more profitable, there are parts of it that have lesser dependence on the UK market and then there are other parts that are less profitable currently and have a greater dependence on the UK market, and it is those parts of the sector, in particular, that will find themselves most affected by the UK decision and that will struggle the most.

Chairman:

I thank Dr. Hanrahan and Mr. Donnellan for coming here today. This is the beginning of a conversation that will go on for quite a while. They could be back here in two or three years' time discussing where we are going from a CAP point of view.

We will suspend briefly to allow the next group to come in.