Oireachtas Joint and Select Committees
Wednesday, 23 October 2019
Seanad Committee on the Withdrawal of the United Kingdom from the European Union
Implications for Ireland of the Withdrawal of the UK from the EU in regard to the Agriculture and Food Sectors: Discussion
I remind members to ensure their mobile phones are switched off. This is important because, if they are not, it causes serious problems for broadcasting, editorial and sound staff. Today's meeting focuses on the implications for Ireland of the withdrawal of the United Kingdom from the European Union in regard to the agriculture and food sectors and it follows on from the meeting we held on this more than 18 months ago. I am delighted to welcome the president of the Irish Farmers' Association, Mr. Joe Healy, the deputy president of the Ulster Farmers' Union, Mr. Victor Chestnutt, the president of the Irish Creamery Milk Suppliers Association, Mr. Pat McCormack, and all their colleagues to update the committee on the implications of Brexit for the agriculture and food sectors.
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.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
The climate change committee meeting is running in parallel to this one. A number of members are on both committees so I excuse in advance those who have to come and go. The witnesses are all experienced in appearing before committees so they will appreciate the fluidity of the situation.
I invite Mr. Healy to make his remarks first, and he will be followed by Mr. Chestnutt and Mr. McCormack.
Mr. Joe Healy:
While I am well used to being beside Mr. McCormack and Mr. Enright, I am glad to welcome Mr. Chestnutt and Mr. Aston from the Ulster Farmers' Union. I thank the Chairman and the committee for the opportunity to outline the key issues of concern for farming and the agrifood sector arising from Brexit. When I addressed the committee in May 2017 on this topic, we all expected that the UK would have left the EU on 29 March 2019, and we would be in a transition period and actively negotiating the future EU-UK trading relationship. However, progress has been much slower than that.
Since the Brexit vote in 2016, there has been a great deal of analysis undertaken on the potential implications for the economy and the farming and food sector of the UK leaving the EU. The results are clear and they are stark. Brexit presents the most serious threat to farming and the agrifood sector in the history of the State. With 37% of our food and drinks exports going to the UK, no other member state and no other sector is as exposed in these negotiations. The UK is the market for 50% or close to 300,000 tonnes of beef exports. The threat from Brexit is frightening for the beef sector.
Even before Brexit, massive damage is being done to agriculture. In the past year alone, Brexit uncertainty and the devaluation of sterling have had a very negative impact on the agriculture industry, with losses in the beef sector alone at €200 million up to the end of September 2019. Last May, the EU Commission and the Government announced a Brexit support fundto support beef and livestock farmers who had suffered €100 million in Brexit losses between September 2018 and 12 May 2019. However, when this scheme was formalised as the beef exceptional aid measure, BEAM,the criteria were so unnecessarily restrictive that farmers applied for only €78 million in aid. The IFA is still insisting that the €22 million underspend is paid out to beef farmers to cover losses. In the cattle trade further losses since May this year have accumulated, with prices at €3.45 per kilo for R3 steers. We estimate that between May and September, a further €100 million was lost and this continues to accumulate at a rate of €5.5 million per week in losses to farmers, hitting the viability of rural areas. Farmer losses do not stop there. Dairy farmers and mushroom growers have also been hit by the collapse of sterling.
In budget 2020, the Minister for Finance, Deputy Donohoe, announced a €110 million fundto be made available by the Department of Agriculture, Food and the Marine in the immediate aftermath of a no-deal Brexit. The IFA is calling for this money to be paid out now to all farmers who have experienced Brexit losses. I remind the committee that these losses amount to a market disturbance under EU regulations. They are due to the weakness of sterling and Brexit uncertainty, which are political factors totally outside the control of farmers. The IFA is clear that in the event of a no-deal Brexit, the EU must provide a €1 billion Brexit fund of market support measures to include direct supports for farmers, structural and adjustment funding, as well as the setting aside of state aid limits.
Since becoming Prime Minister on 24 July, Boris Johnson has pursued a hard-line Brexiteer policy of leaving the EU on 31 October, with the ultimate objective of having an independent UK trade policy. He appointed a Cabinet committed to a hard Brexit and failed to reappoint most Ministers who favoured a softer Brexit. This marked a decisive shift from Theresa May’s Government, which was more committed to a close trading relationship with the EU in the future. Last Thursday, 17 October, EU leaders and the UK Government reached agreement on a revised withdrawal agreement and a revised political declaration on the future EU-UK relationship.
I pay tribute to the Taoiseach, the Tánaiste and Minister for Foreign Affairs and Trade, the Minister of State with responsibility for European affairs, Deputy Helen McEntee, and their officials for their role in the negotiations. I also want to mention the Opposition politicians in Leinster House who have been constructive throughout. On the EU side, I particularly want to recognise chief negotiator Michel Barnier and his team in the task force on Article 50 negotiations with the UK, TF50, for their hard work and deep understanding of Ireland’s interests in these critical negotiations. I also pay tribute to the EU 27 for their unity on this issue over the past three years.
The revised withdrawal agreement includes a new protocol on the Republic of Ireland and Northern Ireland, which replaces the backstop and will come into effect when the transition period expires on 31 December 2020, or later if the transition period is extended at the UK’s request. The new protocol applies to Northern Ireland only. Northern Ireland will remain aligned to key rules of the EU Single Market to avoid a regulatory border on the island of Ireland. These rules cover all goods including sanitary and phytosanitary, SPS, rules for agrifood products and rules on agricultural production, marketing and state aid. On customs, Northern Ireland will remain part of the UK's customs territory and will have the best of both worlds in terms of access to the EU market and the UK market. To protect the EU's internal market, its customs code will apply to all goods entering Northern Ireland from Britain and third countries. EU customs duties will be applied to goods entering Northern Ireland that are considered to be at risk of crossing the Border into the Republic and, therefore, into free circulation within the EU. The purpose of the new protocol is to fully protect the integrity of the EU's Single Market and customs union, and avoid any regulatory and customs checks at the Border between Ireland and Northern Ireland, which would undermine the all-island economy and the Good Friday Agreement.
The IFA supports the new protocol because it avoids a hard border in Ireland. However, we would like to have full clarity on how trade flows will work in practice. We need clarity on the precise arrangements for beef exports travelling across the Border into Northern Ireland and through Larne into Britain. In regard to milk coming from Northern Ireland going into the Republic for processing, Northern farmers and Irish co-operatives need a clear commitment that this product can be labelled as Irish and EU, as it will continue to be in compliance with EU rules.
It is worth recalling that under Theresa May’s all-UK backstop, which was rejected in Westminster, Northern Ireland remained aligned to Single Market rules, while the UK stayed in a single customs territory with the EU, with no freedom to apply lower tariffs. The UK was also bound by measures to ensure a level playing field on state aid, competition law, the environment and climate change, labour and social protection and non-regression from current EU standards. The backstop applied "unless and until" a new trading arrangement was agreed which avoided a hard border in Ireland. Under the new protocol, Britain will have a greater ability to pursue an independent trade policy than it had under the backstop, and this is a cause for concern. This is why the negotiations on the future trading relationship are so important.
The political declaration is a non-legally binding document, which sets out the ambitions of both sides for their future relationship. The changes reflect the new UK Government’s stated intention to pursue an independent trade policy. It contains the shared ambition to have a free trade agreement, FTA, with zero tariffs and quotas between the EU and the UK. However, it notes that the precise nature of commitments will be commensurate with the scope and depth of the future relationship and with commitments to ensure a level playing field. It is all to play for in the future trade negotiations, where incoming EU trade Commissioner, Phil Hogan, will play a key role.While there is no certainty in the current political situation in Westminster, the IFA cautiously welcomes the revised withdrawal agreement on the basis that, if approved by parliament before 31 October, it will avoid a no-deal Brexit. If the withdrawal agreement is ratified, the UK will enter a stand-still transition period until 31 December 2020. The UK retains the right before 1 July 2020 to seek a once-off extension of the transition period to beyond December 2020. However, 1 July 2020 is now only eight months away and that deadline threatens a new cliff edge on 31 December 2020 when, in the absence of a negotiated new trading relationship, the EU and the UK would have to trade on basic WTO terms.
This leaves Irish farmers and the agrifood businesses facing ongoing uncertainty, which is seriously damaging to their businesses. We remain concerned about the impact on our markets and producer prices of sterling devaluation and future trade uncertainty. Therefore, if and when the withdrawal agreement is passed, I strongly advocate an early decision for a realistic extension of the transition period, which would give much needed certainty to Irish farmers and agribusiness. From our experience to date, the trade agreement negotiations on a free trade agreement, FTA, between the EU and the UK will be just as difficult as the negotiations over the past three years on the withdrawal agreement.
I will now comment on Europe's future trade arrangements with the UK and the UK's determination to pursue an independent trade policy. The IFA is concerned that disruptions to the UK market, through the imposition of tariff barriers, border checks, certification requirements or other regulatory changes, or new entrants to the UK market could seriously undermine Irish exports and render our trade uneconomic. A reduction in import tariffs, an increase in tariff-free access or any lowering of product standards by the UK for the Mercosur countries of South America, or for hormoned beef from the US, would fundamentally undermine the competitive positioning of Irish and EU product on the UK market and reduce the value of the UK market.
In the dairy sector, more than one quarter of our exports go to the UK. It is our main market for cheddar. There is no alternative. Increased low-priced competition on the UK market would destabilise the Irish dairy sector. In the sheep sector, the key issue is the division of the existing EU tariff rate quota, TRQ, of 228,000 tonnes of New Zealand lamb imports and the destination of these imports. Across virtually every sector of agriculture, in beef, dairy, lamb, mushrooms and forestry, there is a real threat from reduced access to the UK market through tariff barriersand a loss in the value of the UK market through increased low-cost importsor any undercutting of EU product standards. The IFA is, therefore, seriously concerned about the risk of trade displacement for Irish exports to Britain, where Britain could import products from non-EU countries at lower tariffs and, possibly, lower standards to supply its home market, while continuing to export its own production to the EU. If this were to happen, the EU may have to apply tariff quotas on imports from the UK.
On the Common Agricultural Policy, CAP, theIFA remains seriously concerned about the potential reduction in the CAP budget post Brexit. As a net contributor to the EU budget, the UK exit from the EU creates uncertainty about the size of the CAP budget post 2020. The EU Commission has proposed a reduction in the CAP budget to 28.5% of the overall EU budget, down from 55% in the 1980s. This proposal represents a cut to the Irish CAP budget of €97 million per annum or 5% in nominal terms. With the 2% proxy rate of inflation applied, the real impact of the cut amounts to 17%, or €246 million per annum, for Ireland. A reduction in the CAP budget would directly and negatively impact on Irish farm incomes across all sectors and the viability of rural Ireland. The Irish Government must, therefore, press other member states to increase their EU budget contributions under the multi-annual financial framework, MFF.
The IFA recognises the ongoing commitment of the EU and the Irish Government, with the support of the Opposition parties, to avoid a hard Border on the island of Ireland, with customs checks and other controls and the risks to the peace process. This is vital for farmers on both sides of the Border, for Border communities and the Border economy. If the current withdrawal agreement is ratified, the EU and the Irish Government must be vigilant to ensure the integrity of the market in the Republic and of the EU Single Market is fully protected against illegitimate imports.
The IFA policy position remains that the optimum outcome of the Brexit negotiations would be for the UK to remain within the Single Market and the customs union. However, we are gravely concerned that the policy of the current UK Government is to be outside the Single Market and the customs union and to diverge from EU regulations and standards in pursuit of an independent trade policy. The IFA's objectives for any new EU-UK trading relationship include tariff-free and quota-free trade for agricultural and food products; full UK regulatory alignment to current and future EU standards, including food safety, animal health and welfare, and environmental standards; and continued UK application of the EU's common external tariff and tariff rate quotas for agricultural and food products. The EU must use its leverage in the forthcoming trade negotiations with the UK to maintain the value of the UK market for Irish food exports, which in turn will ensure the stability of the EU food market.
The IFA's overall objectives remain no hard border on the island of Ireland, on which there is progress with last week's agreement; minimal restrictions on trade with the UK; and no scope for the UK to pursue a cheap food policy.
Before I call Mr. Chestnutt, I am aware that Mr. Healy's term as president is coming to an end. I very much enjoyed sitting alongside him at Brexit stakeholder meetings over the past two years. I wish our paths had crossed so often in happier circumstances. I wish him well into the future. Let the games begin for the campaign for his successor.
Mr. Victor Chestnutt:
On behalf of the Ulster Farmers' Union, I thank the committee for the invitation to attend this meeting. It is a pity we are not here in better circumstances. However, we are where we are. Mr. Healy gave an impressive opening statement in which he laid out the past and where we are, so I will try not to be repetitive.
We all know where this crisis began. The Ulster Farmers' Union did not campaign one way or the other but our membership was split. We did hold an event for farmers at which each option was debated. We take our decision-making from our membership. The position of the Ulster Farmers' Union from the start was that in the absence of a compelling reason to leave, there was no reason to do so. We felt this was the right decision to take. We then moved to former Prime Minister Theresa May's first deal, which included a Northern Ireland backstop. We reviewed the deal. Approximately 85% of our produce in Northern Ireland is sold to the GB market. As such, it is our main market. We noted that the first agreement provided for free and frictionless trade for our producers to the British market, which is our main concern. Having been reassured of this, we supported the agreement. As everybody is aware, this debate has been very political from the beginning. In taking that decision and sticking our heads up, we received a great deal of criticism, which in some instances was quite nasty. We are where we are and we stand by that decision.
We have moved on from that point. As we all know, former Prime Minister Theresa May's deal did not get support and there is a new deal on the table. Mr. Healy commented on that deal and mentioned that for Northern Ireland it is the best of both worlds. We are not so sure about that. There are matters on which we need clarification. I would like at this point to set some background to the Northern Ireland industry. Approximately 30%, or 642 million litres, of the milk produced in Northern Ireland goes to the UK; 12% to the Republic of Ireland, ROI; 17% to other EU countries; and 6% to the remainder of the world. All live calves in the dairy trade go to the South and onwards through southern exporters. In regard to beef and sheep, our exports to ROI are worth €83 million. The value of live cattle exports is €9 million. Some 40% of the lambs we produce in Northern Ireland go to the South for slaughter.
I farm as far north as one can get in Northern Ireland. From our farm, one can see over to Scotland. As we speak, there is a lorry picking up lambs to go to Irish Country Meats in Navan. We have done this for the past number of years. A total of 40% of our lambs come south for slaughter. It is not all one-way trade. In the pig sector, 27% of the pigs we kill in Northern Ireland come from the Republic of Ireland. The food industry on the island of Ireland is completely integrated and to try to rip it apart makes no sense. In the poultry sector, 11% of meat goes to the Republic of Ireland - day-olds and chicks. A total of 50% of laying hens go to the Republic of Ireland for slaughter while the other 50% goes to Great Britain. Chicken parts are rendered and some of the rendered material goes to the Republic of Ireland. Some of our litter goes to a biodigester in Donegal while our feathers go to Cork for manufacture so the industry is completely integrated along with some of our produce that is manufactured in Northern Ireland and goes out through Dublin Port. It goes without saying that to try to rip this apart makes no sense at all.
I said that we have a deal on the table but we need clarity. One of the main things exercising us is what would happen to Northern Ireland produce if it was processed in the South. Can it then be treated as Irish and go to the rest of the world as part of EU trade deals? Mr. Healy raised this point. If this produce cannot go to the rest of the world as part of EU trade deals, Irish companies in the South may not want our produce if they cannot market it. The lambs coming from my area to Irish Country Meats in Navan are not coming down to the food market in the South. They are coming down here for processing to go to the rest of the world so they need to be able to access those EU trade deals. We have asked for clarification on this but have received conflicting clarifications. Tom Tynan, a member of Commissioner Phil Hogan's staff, is telling us one thing while our own Government is telling us something else so we are waiting for clarification on that point.
It is the same the other way round. There are qualifying goods. When pigs come up to Cookstown to be slaughtered, which is where the main plant for slaughtering pigs from the Republic of Ireland is located, are processed and go into the British market, do they constitute a qualifying good? Does all pigmeat out of Cookstown then not become a qualifying good? These are the sort of questions to which we need answers so it works both ways. We need those issues to be clarified.
Where are we as far as politics is concerned? It is changing by the hour. It is very fluid. I was over in Westminster with the president giving evidence in a situation similar to this. Afterwards, we spoke to our own MPs in the lobby. At that time, we thought that the DUP would be able to back this deal but we know what has happened since. Who is to know what the next steps are? It seems to be one step and two steps backwards. Mr. Healy is right that Brexit has not only had an impact in the South. We are already feeling the impact in the North. Our milk is 2.3 pence a litre behind the UK price this year. Our sheep are probably about £20 per skull behind the price in the South simply because the southern companies were more anxious to supply Southern lamb rather than Northern lamb because of its security. Regarding our beef, the figure we reckoned we lost due to Brexit was £27 million a month ago. We have no EU or UK beef aid scheme in Northern Ireland so our farmers are feeling the pinch.
On a more positive note, this deal does seem to be the basis of something if we can get some clarity, particularly around goods coming from the North to the South to be processed or goods from the South coming north to be processed. Can these goods be included in EU trade deals or enter the UK market? We would welcome clarification on that. We may be able to come out and support it. From the word go, the Ulster Farmers' Union was constant in saying we cannot have a no-deal situation. We have been resolute on this every time we were asked about it. Some of our politicians said earlier on that they were quite content to go out with no deal. I think we have managed through our lobbying to get through to them and hardly any politicians north of the Border say that now. We have worked on that. We would like to see this uncertainty pass and for us to get to the start line but, as Mr. Healy rightly noted, that is just the start line. We must then negotiate a trade deal but we have had a good history for years as neighbours in the agrifood industry and this history has been reinforced by the complete integration of the food chain on the island of Ireland. Sometimes it frustrates me when I hear the issue of Border communities being raised because this is not about Border communities. It is about the whole island of Ireland. I farm as far north as one can get. My son's milk goes to the South, as do my lambs. My wool goes to Donegal. The whole thing is completely integrated. It is not a strip around the Border so as far as the North is concerned, for the sake of the prosperity of agriculture, we need to do something sensible to get this worked out. Any negotiation always involves a wee bit of give and take.
Mr. Pat McCormack:
I will not read out my statement verbatim because we have submitted our views. While it may be coming towards Mr. Healy's last time, it is my first time in the Seanad. I have appeared regularly before the Joint Committee on Agriculture, Food and the Marine. My predecessor appeared here in May 2017. As Mr. Healy said, all eyes were on 29 March 2019 at that point. There was a degree of complacency because it was a long time away but that day came and went. There was a lot of uncertainty in the build-up to it and there is still a lot of uncertainty. We can see from what Mr. Chestnutt said that uncertainty affects agriculture on the entire island. They can point the finger at the sector from a climate point of view at times but from a sectoral point of view, we are extremely vulnerable to Brexit - North and South.
Some of the figures were mentioned. Mr. Healy said that 37% of food and drinks exports went to the UK in 2018. A total of 50% of our cheese was exported there in 2018, including 83% of our cheddar. We see the likes of Carbery Group having to respond to that at a significant cost to its shareholder producers with a new plant involving the production of mozzarella and other cheeses built at a cost of €70 million or €80 million to diversify its product portfolio. A total of 30% of our dairy exports go to the UK. I listened fully to what Mr. Chestnutt said about integration and how industries depend on each other from a processing and feeds perspective. The flow has been both ways and both sides of the Border are equally vulnerable. How would the likes of Lakeland Dairies market itself in the event of a hard Brexit or a hard border given that it has plants North and South of the Border? A total of 52% of our beef goes to the UK. The beef sector has been in severe turmoil over the summer, much of it associated with the unknown of Brexit. Farmers are fearful about their future. As Mr. Chestnutt said, we need clarity on these issues because the uncertainty is paralysing our industry.
We are not the only ones exporting to the UK. The Netherlands, France, Germany, Spain and Italy all export to it but it is our closest, longest-established and most rewarding market from a number of perspectives given that North-South and east-west trade are equally important. What are the consequences of a hard Brexit?
There will be a lack of confidence in our community, with GDP estimated to drop by 10%. Purchasing power will be absent and that will have an effect on what consumers do and how they react.
Mr. Healy mentioned BEAM. That was to compensate some farmers in beef production until 12 May. It was over-regulated and, consequently, undersubscribed. It was over-regulated because its principal objective was to be a compensation package for the financial losses that farmers incurred in beef production. It was regrettable that not all farmers in beef production were part of that scheme. The ICMSA made no apology in highlighting the issue that dairy farmers were excluded. Ultimately, dairy farmers with 41 or 42 cows found themselves excluded. It brought in environmental constraints that made it unattractive for farmers to apply for a scheme that should initially have been to compensate for losses incurred in beef production. Since 12 May, there have been significant and ongoing losses. While we welcome the €85 million in the budget last week, the shackles need to be taken off that. It cannot be a no-deal compensation package. It should be retrospective package covering 12 May to budget day. Farmers have ongoing losses. We have seen frustration among farmers and fear among farm families. All farmers in beef production need to be compensated in the future.
I touched on the finalisation of the agreement. We need to remove the uncertainty as soon as possible. The transition period needs to allow for negotiations and stabilisation to take place. Volatility is the greatest challenge for farm families. That has been exacerbated as a result of a potential Brexit. Unfortunately, in this most recent budget, the Government failed to grasp the nettle with a farm management deposit scheme, which would allow farmers to build a tax-efficient buffer to deal with poor years and unexpected and unwarranted income volatility. We are exposed to the turbulence caused by politicians around the globe, as we have seen with President Trump and the USA's tariffs on the Kerrygold brand.
With regard to the farm management deposit scheme, an enterprise stabilisation fund is needed. I mentioned the Carbery Group but other parts of industry will have to cope with whatever Brexit brings to us. While we may be six or eight months away from the original date, there is still have much unknown ground ahead.
Critical issues in the future include being tariff free. The introduction of the proposed tariffs would mean an increase of approximately 3 cent per litre of milk. As it is, the unknown future is probably costing 3 cent per litre of milk as a result of currency fluctuations and uncertainty. It was alluded to earlier that the CAP budget would be significantly hit. It is imperative that the CAP budget be maintained. It is up to the 27 other member states to secure that for the future.
Input costs are always a significant issue. We have many members along the Border who are concerned that mutual recognition of approval and accreditation needs to be brought in, whether it is for feed or for various other farm inputs. It would be anti-competitive in any other scenario, especially along the Border. The costs of competitiveness need to be addressed. That is an ongoing issue, including as we face Brexit. Energy, credit, legal and other costs such as insurance need to be addressed in advance of Brexit. Mr. Healy alluded to trade deals. We will have the EU and UK trade deal, with the potential of other deals between others and the UK. With this in mind, our Government needs to be more proactive in securing the rejection of the Mercosur deal. The implementation of this deal and its impact will more than likely be felt at the same time as the impact of Brexit following the transition period. It is imperative that the 99,000 tonnes of beef potentially coming into Europe, along with the beef potentially entering the UK, are readjusted.
Consumer confidence is a critical issue and we need to maintain that, considering our island status.
There are day-to-day on-farm challenges for farmers along the Border with land fragmentation, including issues with the basic payment scheme and nitrates.
We have succeeded with regard to health on an all-island basis. We have eradicated brucellosis from the island of Ireland and it is imperative that, whatever happens with Brexit, the relationships that have been built and enhanced over recent decades are built on to eradicate diseases such as bovine viral diarrhea, Johne's disease, and ultimately tuberculosis too. That level of co-operation must be continued and intensified for the good of all of us.
The potential of a hard border with the Six Counties seems to have reduced but we must be conscious that there is no deal until there is a full deal. Some 32,000 milk lorries transit the Border each year. Any Border checks would have a significant cost associated with them, without even mentioning tariffs. We need to continue to maintain alliances at a European level to support the Irish position. We are extremely exposed, both North and South. A transition agreement needs to cover as long a time as possible to get the best outcome. As a nation, we need to recognise that farm families need tools to get through this and the volatility that we have seen recently. I mentioned the farm management deposit scheme and the enterprise stability fund. We cannot afford to have a hard border. It is essential that the existing trading arrangements continue for the benefit of both sides of the Border and further afield.
We have 15 minutes left in this session. Before I open the floor to my colleagues, who I know all have many good questions, I will ask a different question of each of the witnesses. We will take all the answers at the end.
Mr. Healy mentioned market disturbance under European regulations. Which regulations is he citing? More important, what actions has he taken with sister organisations in other member states to see if pressure can be put on the EU for that to be realised?
Mr. McCormack mentioned future trade deals beyond Brexit, especially for his sector. What is the onus to diversify products? He mentioned Carbery Group. How does that look across the sector?
My question for Mr. Chestnutt might be slightly unfair. He can answer it personally or on behalf of the organisation. Does he regret not campaigning on the referendum?
I congratulate all those who made presentations. They have highlighted the complexity of the agrifood industry and the fact that it is an all-island industry. Following the conversations I have had about Brexit, I am concerned about "Brexit fatigue". If people think they are fatigued after three years then, by golly, they will be fatigued if the UK leaves. We may still be having these conversations in ten years. My first question is for Mr. Chestnutt, who may have been interested in Mr. Healy's comments. I was at a British-Irish Parliamentary Assembly meeting earlier this week. One theme that came out of that meeting is that the Scottish and Welsh are not happy with the deal currently on the table. They feel that they will be disadvantaged and that it is an unattractive arrangement.
We have an all-island agrifood economy. Is there a mechanism that allows farm representative organisations to work together to represent agriculture or do they have fundamentally different positions that they cannot agree on? I acknowledge the issues related to pricing and trade deals. Those affect all organisations.
In the context of the Mercosur agreement - the provision relating to the 99,000 tonnes represents 1.2% of EU beef production - it will be like watching the fly on the wall when the Brexit bulldozers run us over. Are all farm organisations North and South working together to try to get a good outcome from that?
Clarity is the elephant in the room here. Nobody can get clarity in order to make plans or arrangements for their businesses. I look at other businesses and industries that have the potential to be affected by Brexit. I am aware that tensions exist between the organisations our guests represent and the processing sector. Is there a dialogue taking place in order to work out how they can take the risk out of supply chains and ensure that any disruption will be minimised? Is the disconnected supply chain leaving them in a position where they cannot have those conversations?
I welcome our guests. This discussion is of extraordinary significance in that the agricultural sector - and the ancillary jobs in food processing and other areas - is the most threatened sector in the context of either a soft or a hard Brexit. The sector we are discussing is the most vulnerable and exposed, and that makes our discussion very important. The transition agreement will be of extraordinary significance. It is hoped that some of the issues our guests raised will be satisfactorily resolved within the transition agreement over the next couple of years.
There is a huge problem in the beef sector. I could not be more aware of that because I have attended the various beef protests - not officially organised by the our guests - and met those involved. Leaving aside the rights or wrongs of the protests or matters relating the tactics, there is a major issue in terms of income. People sector are in very difficult circumstances in terms of their families. They are at risk when it comes to keeping their homes and their livelihoods. The state of affairs in the beef sector is shocking.
Mr. Healy indicated that he is concerned about the displacement of Irish products by those from Third World or Mercosur states that may come into the UK after the Brexit agreement goes through in a few weeks, as appears will now happen. How realistic is that? Is he exaggerating the position to some degree? Will there not be an attraction for good-quality Irish food in the UK? Ultimately, will that attraction not be sufficient to keep what we have in that market? There is the possibility within the transition agreement of arranging the alignment of standards, etc. How realistic is that?
How much of the beef sector's problems lie outside the Brexit agenda? Out guests stated that they associate all the problems with Brexit. How many of them are outside Brexit in terms of lifestyle issues, pricing and other matters that are not necessarily Brexit-related? Could our guests isolate which problems relate to Brexit? For example, is it the fluctuations in the value of sterling? There is a possibility that those fluctuations might work in our guests' favour in the future.
I am interested in the position of small farmers who have off-farm incomes from other work. In the past, it was considered that they did not need support because they had jobs but they are subventing their beef farms and are almost broke in many cases. How do we deal with them? What practical steps would our guests recommend taking in order to support those people? What interventions can we realistically make in that regard? Will it all be checking the post stuff and, if so, how much and in what form? How do we cushion the beef sector?
I understand the principles of CAP in that we have to have quality food available at a price at which consumers can buy it. That is the principle on which CAP functions. Where do our guests see the supports going in and how will that happen? How do we deal with the crisis in the beef sector? How much of it is being caused by Brexit?
I welcome the three groups and thank them for their presentations. One can use the word "stark" in this case. We were all familiar with the figures before our guests came in but their presentations offer a new realisation.
Following on from the Chairman's questions, I am aware that the two Republic of Ireland organisations are lobbying continually in Brussels. The IFA is in a grouping with COPA; I am not sure about the ICMSA. In those deliberations, and our guests stated that they were lobbying in Westminster, with the collective groupings with which they are involved in other European countries in particular, how are they interacting on this issue? It is not as big an issue everywhere else as it is here. Is it an issue at all? Are they as concerned in Brussels as we are here? Are our guests getting support from them? I would like to hear about the type of engagement that is going on in that regard.
On a similar line in terms of CAP, in fairness, the Government is prepared to increase their contribution to the MFF to fill the hole that will be left if the UK leaves the European Union. We were in Brussels getting briefings on this and trying to find out what was going on. We were told in no uncertain terms that even if all the other states agreed and the budget was brought up to the status quo, there is no guarantee that the CAP budget would increase or that the extra money that would come in would go to CAP and that it might spent on immigration or climate change, or in some other area. What are our guests hearing about that? It has been a while since we were in Brussels and there have been many changes in the interim. Our guests are in Brussels on a regular basis. What are they picking up in that regard?
I do not want to be political but based on the presentations, this committee has a role to play in terms of going back to the Minister with regard to the underspend in the BEAM scheme. That is the reason we are here. I have raised this with the Minister. I have been told again, in no uncertain terms, that it is an application-led scheme, which means that €22 million will be returned. The committee has a role to highlight, on the basis of the presentations we received, that this cannot happen. If we do not spend the entire budget for the first scheme we are seen to introduce, it will send out the wrong message in the future when we go looking for funding cap in hand. I am not being political but we have a role to play in respect of that matter.
Our guests have many questions to answer. They might laugh at this one but I would like to get their take on it. I have a bull at home that I bought in Trillick, County Tyrone. The man I bought it from would have been showing bulls or heifers in Sterling, in Scotland, the week before or the week after. The deal we did was seamless. How do our guests see a deal of that nature? It might sound simple but it is not all about trade. Those types of transactions are going on farm to farm in the Republic of Ireland. They are one-off transactions. It is not all about the Lakeland Dairies organisations and thousands of pigs and sheep. Based on what our guests have seen in the proposed agreement, and Mr. McCormack mentioned disease and animal health, taking all of that into consideration, how do they see my transaction on the bull or the position of my friend in Tyrone, who shows bulls in Scotland one day and in Carrick-on-Shannon the next, selling them into the Republic of Ireland and the UK, being sorted out when we get down to the nitty-gritty?
Many of the issues have been addressed but I will make some comments. A recent analysis by the Central Bank indicates that farmers in the west and the midlands would be hardest hit by Brexit. These people are predominantly beef and sheep farmers. To what extent do the ICMSA and the IFA advocate for farmers on a geographical basis? The biggest fallout has been identified for these areas. That is on the back of the very troubling times regarding beef prices about which we are all aware.
What comes next for the beef task force?
There were many questions asked there and I invite our guests to comment on any of them they feel were relevant but not to feel that they must answer every single point if someone else has already done so. I invite Mr. McCormack to respond first.
Mr. Pat McCormack:
I will start where Senator Mulherin finished with the question about the beef task force. It is regrettable that we had scenes outside the gates of factories and that it came to that. We need to get that task force up and functioning. Immediately after this engagement with the committee, the Irish Creamery Milk Suppliers Association, ICMSA, are going to have a bilateral discussion with the task force chairman, as I am sure other organisations will be doing in the coming days or maybe have done already. What was in the agreement must be delivered for farmers. Any movement on specifications without the four-month notification period cannot be tolerated and, equally, we need to be sure that the transparency that was promised is delivered. Mr. Healy and I were with Bord Bia this morning and work on that index is ongoing and has been up and running since 19 September. It must be approved by the task force in order that it can be out there but it needs to be out there for farmer confidence.
I ask everyone to speak through the Chair. I ask everyone to be conscious to not mention cases that may not be involved in this session. I ask members of the committee to be careful in their questions and witnesses to be careful with their responses. I would very much like if we got back to asking questions through the Chair. Mr. McCormack was answering and I will come back to Mr. Healy in due course.
Mr. Pat McCormack:
We would obviously like for the conditions to be right for the task force to meet and to move forward meaningfully. We need to restore farmer confidence in the industry. It is understandable but disappointing how we got to where we are. Where we were last Monday week will not achieve anything. The frustration that was out there is understandable, but we need to get back around the table and secure what was agreed a number of weeks ago, on the Sunday that Dublin won their fifth Gaelic football title in a row, because we could be here in another five years if we continue not to engage. It is absolutely paramount that we engage.
Senator Mulherin mentioned that farmers in the west and the midlands would be hardest hit by Brexit. That seems to exclude my area from any Brexit fallout.
Mr. Pat McCormack:
I gave the example of Carbery and there is significant investment going on around the country to try to minimise the shock effect of Brexit, right down to the west Cork coast.
Senator Paul Daly asked a question to which I will respond. The ICMSA is involved with the European Milk Board, EMB, and there is good support and a good understanding of the potential of Brexit in that relationship, in particular the potential of Brexit from an Irish point of view because we have the unique structure of the land border.
Senator Daly also spoke about the bull he bought in Tyrone. It is necessary that UK farmers continue to farm in compliance with the European requirements. One could look more favourably on continued open trade, but it is an imperative that they farm to the European level in compliance with standards for veterinary treatment and medicinal requirements.
Senator O'Reilly mentioned the transition period and good food. The critical issue is that we do not find ourselves tariffed out of the marketplace through significant tariffs that would leave us uncompetitive in the UK. The UK has traditionally followed a fairly merciless food policy on cheap food. We need to find ourselves competitive in the supermarkets.
Part-time farmers were compensated under the beef exceptional aid measure, BEAM, scheme irrespective of whether their off-farm income was earned through a standard job or they are multimillionaire hobby farmers. That is right if those farmers were involved in beef and had a normal or reasonable off-farm income. Equally, it is imperative that men with 42 or 43 cows are also part of the scheme. It should also apply to men with 60 or 80 cows who may be struggling to put two or three kids through college.
Senator Marshall mentioned the Mercosur deal, which is going to put further pressure on farmers. There is 300,000 tonnes of Irish beef going to the UK and we could be trying to relocate a market for that volume of meat at the same time that there will be 99,000 tonnes coming from South America into the EU which is already saturated to the tune of 102%, 103%, 104% or 105%, whatever the figure is, of the available market.
Mr. Victor Chestnutt:
I thank the members of the committee for their questions and I will pick up on some that I think are relevant to Northern Ireland. Senator Paul Daly asked a couple of questions about how we are getting on lobbying in Westminster and the UK. The beef crisis is to the fore, especially with Scottish and Welsh beef, although not so much with the English. We are at the bottom of the pecking order, along with the Republic of Ireland, in prices because we export so much and the UK has a home market. We talk to them but there is no indication that they are on the same page as we are on the island of Ireland about the beef crisis.
I am a bull breeder so I am in that business. I breed two or three different breeds of livestock. My Charolais stock bull came from Yorkshire, through Stirling Bull Sales, and my Angus stock bull came from the South. It is imperative that we keep that going.
I also breed sheep and my stock ram came out of the South this year and there is that trade, but it is highly regulated and has a paper trail. Getting the right certification would be another page and it should not be impossible, so we will endeavour to try to keep those trade flows open.
Senator Marshall brought up the issue of beef and the Mercosur deal. We need to remember that environmental standards and the cost of labour mean that somebody in Brazil can run a village and not pay labour costs. Those are all the well-rehearsed reasons we should not have to compete with them on price. It is worth noting that it takes 88 kg of carbon to take in 1 kg of beef from South America, whereas one produced at home only takes 18 kg, excluding any carbon sequestration our hedges or grassland do. We cannot export our environmental problems if we continue to import beef.
The UK has proposed a free-trade deal for a certain amount of Brazilian beef, but even after that, steak cuts coming out of our factories in the North can sell wholesale at £11 per kg. The Brazilians can produce it at £6 per kg and the EU has cut its tariffs on that meat to £2 per kg. That effectively means that the Brazilians can still undercut our market by £3 per kg for those better steak cuts. That is a big concern going forward.
Senator Marshall also asked about the supply chain. We are making efforts but they are moving fairly slowly and we need to ramp up those efforts. We need a fully integrated supply chain. It is undoubtedly much slower than I would like and all of our organisations must keep working on that to try to integrate the supply chain.
On support for the beef industry and how we think it could be delivered, as far as I can see, there is only way we can get support for the beef industry in the long term. We have an island that can grow grass and that grassland needs management. It cannot all be managed by dairy cows. We need to support the beef industry for managing grassland and I suspect that this is one way we, as managers of our landscape, should look at drawing down support to the beef industry.
The Chairman asked if we regretted not calling for a remain or leave vote in the referendum. The Ulster Farmers' Union has a command structure from which we take our steer, and our farmers were well split. There are other reasons that people wanted to vote for Brexit. It is our job to look after the interests of farming but there are other reasons. People did not like the future direction of the European Union and there were other political reasons. We were not going to be drawn into the field. We do not regret the decision, which we think was the correct one. There are many people in Northern Ireland on both sides of the debate who would say we were correct in that.
Mr. Joe Healy:
I apologise for interrupting earlier. To go back to the question that was asked, it is very clear that the next round of the task force will take place when the injunctions are lifted. The Goodman Group needs to ensure those injunctions are lifted and to allow progress to be made on the issues that Mr. McCormack outlined.
On market disturbance, the €50 million was secured under Article 221 of Regulation (EU) No. 1308/2013. A question was also asked about work in Brussels. As the first vice president of COPA, I am in Brussels quite often. We continue to meet the Commissioner, Mr. Phil Hogan, and other Commissioners and MEPs from other countries who we would not meet in Ireland. This is to ensure we can put the facts in front of them. We had done the analysis on what farmers were paid between September 2015 and March 2016, which was pre-Brexit. We then compared that with the prices paid in the period from September 2018 to March 2019. Those were the facts and we were able to highlight those. The figures even excluded the increase in costs in the meantime. When the prices were explained to the politicians and the other farm organisations they appreciated the huge difficulties Irish farmers were experiencing as a result of the uncertainty of Brexit. That is without a no-deal Brexit or anything like it.
Throughout the Brexit negotiations, and indeed previously, the Irish Farmers' Association had an incredibly strong relationship with the Ulster Farmers' Union and the farming unions in Britain, including Minette Batters, president of the National Farmers' Union in the UK, Andrew McCornick, NFU president in Scotland and John Davies, NFU president in Wales. Just yesterday, I spoke in London at an event organised by the Agriculture and Horticulture Development Board, AHDB, on global Britain and the implications of Brexit. I was speaking from an Irish perspective on the Brexit implications for Ireland.
Senator Marshall asked about Mercosur, an issue that has been well covered already. As farmers, we see all the asks being put on us. We hear our representatives in Europe and our politicians speak about climate change and the need for farmers to do this, that or the other. We go to meetings where we try to embrace the issue of climate change and highlight its importance. While we were doing that, however, the same European politicians agreed a deal with Mercosur. Farmers see large tracts of the Amazon rainforest being destroyed. We highlighted the fact that an area the size of a football pitch was being destroyed every minute in Brazil. There is hypocrisy attached to that and there is a promotion of double standards of production, especially when one considers the standards of production that Irish and European farmers have to live up to. That is the difficulty around Brexit. Last year, EU beef production was 102% of what was required by the market. That 2% excess is equivalent to some 160,000 tonnes of beef. At the same time, 270,000 tonnes of beef was imported from the Mercosur countries, of which 140,000 tonnes was from Brazil. If the pitch is level and if we produced beef the same way as it is produced in Brazil, we would not be allowed to put it on our shelves. We are looking for a level playing pitch.
Senator O'Reilly asked how realistic is the prospect of Irish product being displaced. That is a very realistic prospect. The idea of a cheap food policy in the UK is major issue and one of our biggest concerns. I spoke to my colleague, Minette Batters, in the UK some 12 months ago at a meeting hosted by the NFU in Newcastle. Ms Batters commented that she had just met the chief executive of Tesco UK and his words to her were that the average shopper visiting a Tesco store in England had £85 or less to feed a family of four. If they had the choice between a cheap product and one produced to the top standards in the world, they might choose the former. I believe displacement is very realistic. We see the race to the bottom among retailers at the moment. They may have a 33% discount on beef one day and 50% off the next day. They are willing to use beef as a loss leader because research has shown that people who put meat in their shopping basket will spend four times more than those who do not have meat in their basket. Retailers are willing to use beef as a loss leader. The average retail price of beef in the UK is £8.50 per kilo. The average retail price in Ireland is €8.97 per kilo. The UK accounts for two thirds of our beef. We are talking about €8.60 per kilo at retail level but beef is sold to manufacturing and food services sector at an even lower price. The fears in this regard are not a case of farm organisations crying wolf. They are very real and we are seeing the effects already.
On small farmers, there is no discrimination in the payments made to part-time farmers, small farmers or big farmers. The only discrimination we have seen over many years has been in the beef exceptional aid measure, BEAM. Someone could own an airline and draw money from the BEAM, whereas someone milking 41 cows could not draw it. That approach was as close to discrimination as I could see. It was wrong and it was pointed out to the Minister and Department. Senator Paul Daly made a point about revisiting that. It beggars belief and highlights how wrong the regulations on distribution were to see that two sectors, the suckler and beef sector, that are on their knees have not applied for all of that money. The only reason they have not applied for it is the restrictions that were put in place. A farmer who milks 45 or 50 cows is as much a beef producer as a dairy farmer, if he or she finishes the stock on the farm.
With regard to the Common Agricultural Policy, the proposals include a 10% increase to the multi-annual financial framework, MFF, which would increase from 1% of gross national income to 1.1% of GNI. Unfortunately, it appears that the cost of the new initiatives on defence, security and migration will exceed the amount generated by the 10% increase. This has resulted in the 5% cut to CAP. As I highlighted, by the end of the next round of CAP, the total of the EU budget allocated to CAP will be 28.5%.
In 1985, a total of 55% of the EU budget was spent on CAP. One of the original aims of CAP was to ensure an adequate supply of top-quality food to the consumer, a box we have more than ticked. Another was that it would be available at affordable prices, another box we have more than ticked. In the 1960s, when CAP was introduced, 30% of the average household income was spent on food, whereas today, the average throughout Europe is 10%, or 9.2% in Ireland. Last year, Irish families spent €124 per week on transport and €123 per week on food. That gives some idea of what CAP has done for the consumer. Nevertheless, if consumers were asked about CAP or what they understood about it, many would reply it was a benefit or payment for farmers. In essence, however, it has benefited the consumer more than it has the farmer, given that I am not sure whether it has achieved its third aim, namely, to provide viable incomes for farmers.
Senator Paul Daly asked about a bull and I thought for a moment he was talking about the bull we saw Boris Johnson leading around the place. Mr. Chestnutt has answered the question quite clearly. Over the years, pedigree sheep were often bought across the Border and from Scotland. When trade becomes seamless, one takes it for granted. Issues arise only when they are raised.
It is apt to end on the note: "When trade becomes seamless, one takes it for granted." It sums up many of the discussions we have had over the past three and a half years in every sector. I thank all our guests for their presentations and for their efforts over the past three and a half years. I wish them well for the future, and remind them our door is always open and that we want to work together.
I propose that we suspend for a few moments to allow our guests to leave the room and to set up for our second session. Is that agreed? Agreed.
I welcome Mr. Paul Kelly, director of Food Drink Ireland, and Mr. Conor Mulvihill from Dairy Industry Ireland. I thank them very much for appearing before the committee again. We appreciate their presence and patience, given that the previous session ran a little over time and we had to go briefly into private session.
Before we begin, I must remind everyone of the rules on privilege. 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. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If, however, they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of the proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
As I explained to our previous guests, a number of committee meetings are taking place in parallel as Wednesday is the busiest day of the week. There have not yet been any votes in the Seanad but there will be in due course. It is always a little fluid, as I am sure our guests will appreciate, but we are very grateful to them both for attending.
I invite Mr. Kelly to make his opening statement.
Mr. Paul Kelly:
Food Drink Ireland is part of IBEC and is the main trade association for the food and drink industry in Ireland. It represents the interests of more than 150 food, drink and non-food grocery manufacturers and suppliers. We work with our colleagues in Dairy Industry Ireland, the director of which, Mr. Mulvihill, joins me today; Drinks Ireland; Meat Industry Ireland; and the Prepared Consumer Foods Council. We welcome the opportunity to appear again before the committee, having done so on the same subject in 2017, and would like to acknowledge the committee's ongoing focus on Brexit as it affects agrifood.
Brexit involves an unprecedented fracture of the Single Market, with Ireland particularly exposed. The food and drink industry remains especially reliant on the UK market and is the sector most exposed to Brexit. While the UK market as a percentage of our overall exports has declined in recent years and now stands at 37%, in absolute value terms it continues to increase and now stands at €4.5 billion, a 32% increase in value terms since 2010. In the case of certain sectors and categories, it is a much higher level of exposure, with 50% of beef exports, 50% of cheese exports, 71% of beer exports, 85% of cider exports and 66% of prepared consumer foods exports going to the UK. This demonstrates the importance of maintaining our market position in this high value, high quality market that has a substantial food deficit and of not relinquishing the market to global competitors.
Irish food and drink exposure in absolute value terms is similar to that of other large exporters to the UK, such as France, Belgium, the Netherlands, Germany and Italy. In percentage terms, however, we are between four and five times higher. Typically, less than 10% of those other member states' food and drink exports is to the UK. This highlights the unique circumstances faced by Irish industry and the need for exceptional mitigation measures. A further €4 billion of exports goes to the other EU 26, with most using the UK landbridge. Protecting our connectivity to continental EU markets is critical. It is also an important trade route for food and drink ingredients and finished goods travelling from the Continent to Ireland.
In the event of a no-deal Brexit and the immediate imposition of tariffs, it is vital the EU institutions and national governments recognise the potential for economic disruption and take decisive steps to offset such risks. Tariffs are in effect a tax on trade and commerce. They would decimate much of Ireland’s food and drink exports to the UK. EU tariffs on supply chain imports from the UK to Ireland, such as the 130 million glass bottles purchased by the Irish spirits industry from the UK, would lead to cost competitiveness challenges for Irish food and drink producers. To support businesses during a hard Brexit, alleviation measures will be needed to support Irish industry. Tariffs flow back to central exchequers at national and EU level and must be recycled into a tariff stabilisation fund to offset serious damage to exports and job losses.
Additionally, a temporary EU state aid framework to support companies through any adjustment period, with funds amounting to 5% of the value of current annual export sales to the UK, will be needed annually for three years from domestic and EU sources to help Irish companies innovate, diversify into new markets, train staff and invest for the future in capital towards enabling technology, carbon efficiency, plant renewal and expansion geared to improve competitiveness. Measures are also needed to ensure landbridge access to continental Europe and the provision of sufficient capacity on direct sea routes.
A no-deal exit would deliver a major shock to the rural economy. Those most vulnerable to job losses already live in areas with fewer opportunities, a lack of other viable employment and lower incomes. The companies most exposed are both capital intensive and low margin. If firms collapse in a no-deal scenario, they will not be easily replaced. Decisive and far-reaching Government intervention would be required to protect jobs and to support vulnerable but viable firms from day one. The risk of no deal remains imminent and action is required, including the following important steps. To save viable but vulnerable companies in trouble, we need to reintroduce an enhanced enterprise stabilisation fund, in the same vein as was available during the financial crisis in 2009. To maintain jobs in viable but vulnerable firms where short-time work is not possible, we need to introduce an employment subsidy scheme. To assist with cashflow in small and medium enterprises, SMEs, we need to accelerate the current SME credit guarantee scheme’s coverage. Finally, to help companies diversify, we need to introduce a new scheme for export credit insurance aimed at companies affected by Brexit and at diversifying them away from the UK market.
Timing, in this regard, is of the essence. Our experience from 2009 shows that it took up to ten months from agreement on a state aid framework at a European level until companies could draw down supports. In a no-deal scenario, if supports were not available until the middle of 2020, it would be far too late to sustain enterprises and jobs in many areas. It is imperative we introduce legislation and have structures in place to administer the schemes as soon as possible. The measures could be partly funded by new tariffs that will have to be levied on Irish imports from the UK.
I turn to the deal scenario. Last week’s political agreement between the EU and the UK has much to commend it, not least relative to the catastrophic implications of no deal. It includes far-reaching and vital provisions to avoid a hard border on the island of Ireland, protects the common travel area, provides a status quotransition period and allows talks to move on to the future EU-UK relationship. Nevertheless, Brexit was always an exercise in damage limitation. The new deal goes some way towards mitigating the potential risks to the all-island economy and supply chains but we will inevitably end up in a worse place than where we are now.
The deal means Northern Ireland will be subject to preferential, but potentially complex, new customs arrangements. Meanwhile, the political declaration on the future EU-UK relationship is far less ambitious than Mrs. Theresa May's previous deal. This could have significant negative economic implications in due course. We have also been left burdened with tight, over-optimistic timelines to agree a future trade deal, which do not reflect business realities.
Any future trading relationship, unless it involves continuing membership of the Single Market and customs union, which it will not, will be sub-optimal to the current arrangements. The extent of tariff and non-tariff barriers faced by agrifood and drink products imported into Ireland is clearly illustrated in the graph included in our submission. That comes from a report published by the ESRI in July 2018. The report was commissioned by the Competition and Consumer Protection Commission, CCPC. While exports to the UK would face a different tariff regime, tariffs and non-tariff barriers would be similarly prohibitive. A future trading relationship may or may not result in reduced or zero tariffs, but many other non-tariff barriers and hence costs would remain. The graph clearly shows a strong correlation between tariffs and non-tariff barriers - the higher the tariffs, the higher the non-tariff barriers will be. Typically, one finds agrifood products near the top of the graph.
Copenhagen Economics, in a February 2018 report commissioned by the Department of Business, Enterprise and Innovation, quantified the impacts on Irish goods exports across various scenarios and these are summarised in the next graph. It quantified the impacts across a range of sectors including the three most exposed food subsectors, which are processed foods, beef and sheep meat and dairy. Looking at each of the scenarios, processed food exports to the UK by 2030 would be 45% below the non-Brexit baseline in a FTA scenario. For beef and sheep meat exports to the UK, it estimated they would be 28% below the 2030 non-Brexit baseline level in a FTA scenario. Dairy exports would be 37% below the 2030 non-Brexit baseline in a FTA scenario. I will not go through the detail, but members can see in the statement the percentages for the various other scenarios, that is, customs union only, EEA and WTO. All of those are significantly more negative compared to where we are now.
Copenhagen Economics also quantified the impacts on production and employment in each sector and repeatedly highlighted that regulatory divergence, specifically common EU regulation on food safety standards, food inspection requirements and common labelling requirements, was the main factor affecting exports. Any future trading relationship will, therefore, still be challenging for the food and drink sector and will require substantial Brexit mitigation measures, such as a temporary state aid framework, enterprise stabilisation, employment subsidies, SME cash flow and market diversification, as I outlined earlier for the no-deal scenario.
The retention of free access to, and maintenance of the value of, the UK market are of critical importance. Any future FTA must include the following elements. All sides must commit to negotiate an ambitious and balanced agreement that prioritises continued tariff and barrier free trade, long-term growth, investment and stability. We must avoid tariffs or other import quota regimes between both parties. There must be the establishment of a mechanism that will facilitate keeping EU and UK food standards under the scope of veterinary legislation as well as under food and drink law in general as closely aligned as possible. We need the introduction of a mutually acceptable food inspection system regarding imports from third countries. Ensuring a continued close relationship between the UK and the European Food Safety Authority, EFSA, is key to continued future alignment of food and drink standards. The objective must be continuing joint risk assessment with a common database to minimise divergence in standards and avoid trade impediments. A similar objective applies to animal health, welfare and the environment. Transitional arrangements of sufficient length for businesses to plan and prepare for any new FTA arrangements will be required to bridge the gap until the future EU-UK agreement enters into force.
The necessary measures to respond to Brexit can be summarised as follows: additional support measures for agrifood and drink in the event of both no deal and deal, particularly in the areas of exceptional state aid supports, market diversification and market access; a comprehensive and frictionless future trading relationship; regulatory convergence, not regulatory divergence; a transition period of sufficient duration.
I again thank the committee for the opportunity to attend and welcome any questions members might have.
I thank Mr. Kelly. I appreciate the thoroughness of his presentation. It covered a number of key areas and was complementary to the session we had earlier. Before calling my colleagues, I have two questions on something he did not touch on. Looking at the impact of Brexit, not the potential future impact of no deal or getting the right trading relationship or the transition period, and what has happened since the vote in 2016, how has that impacted the industry in terms of uncertainty, business decision-making and currency fluctuation? Is it possible to quantify what impact the past three and a half years have had on the industry and, indeed, is it something that can be retrieved?
I call Senator Paul Daly.
I have another meeting at 4 p.m. so if I leave before Mr. Kelly has an opportunity to reply, I will read the transcript. My question is a follow-up to the Chairman's. Even if we got our wish list relating to Brexit, we are still dependent on how markets gauge it and sterling can respond by either strengthening or weakening. It is something we always had prior to Brexit, but it was not as unstable as it is now. How can we insulate against that into the future, even if we get what is seen as favourable from Mr. Kelly's perspective for his companies? How can we insulate against how the market reacts to sterling?
Second, will Mr. Kelly go into further detail on how he sees the landbridge working, especially for perishable goods? It is will not be seamless. The nature of much of his product, possibly all of it, is that it has shelf life. Does he see the use of the landbridge as a major problem in the future?
I welcome the witnesses and apologise for not hearing all the presentation. I had to meet a group visiting the House. We discussed this in the previous session in more depth and I will just reference it now, but there is an enormous sectoral problem within the overall agriculture and food sector. There is a problem in the beef sector. This sector is strongly linked to the UK economy. There is a difficult situation in the context of Brexit, but the beef sector is particularly threatened and in difficulty now. Will Mr. Kelly comment on that? Apart from subventing farmers with direct payments, are there steps that are not being taken currently to maximise the marketing and sales of our beef and the way we present it? Where does he see the threats to the price now? We are aware of the fluctuation in sterling, and the potential of a no-deal Brexit was enormous. However, leaving that aside, are we adjusting properly to the issues with beef, beef sales and the type of market that exists for beef?
The reason I am going on about this all day is that I met the protesting farmers on three nights for an hour each night. I sat with them, talked to them and listened to their stories. People might talk about the efficacy of their protest or otherwise, but that is a different debate. The important matters in this context are the hardship, the levels of poverty, the threat to their business and the fact that they will not be fit to be primary producers for much longer, which presents its own problem.
How do the organisations see the marketing of beef, new products and research addressed? Have they any kind of a strategy to get over that? Our guests may have elucidated these points in my absence. If they did, I apologise. However, this is a real issue for families. Many of them were actually prepared to give me documentary evidence on the nights I met them. I did not accept it but I know anecdotally any small farmer with beef as a major component of his or her income is supplementing it with money from an outside job. Either that or it is not sustainable. These farmers should not be subventing their farming incomes.
Mr. Paul Kelly:
The impact has been significant uncertainty, which has made it difficult for businesses to deal with it. It was quite noticeable, particularly for the medium to larger-sized companies, that once they got over the initial shock, they went into project-management and problem-solving mode. It was approached as a significant business problem. The approach taken was to look at in a structured fashion. Initially, this was done on the basis that there would be some form of a withdrawal deal and then a move into the 21-month transition period. Nobody saw this as good for the reasons I outlined earlier, namely, all Brexit outcomes are bad outcomes. Businesses were planning on this basis. As soon as we ran into all the political difficulties around the withdrawal agreement, the level of uncertainty increased dramatically. That caused quite a number of problems for companies in terms of their planning and what they needed to do. The closer they were to market, the more they had to invest large sums of money in terms of stockpiling. Stockpiling brings a whole range of concerns and costs. It means that one must interfere with production efficiencies because one might be bringing people in for extra shifts. There are costs associated with that. Then one has to hire warehousing space and additional working capital is tied up as a result. This happened or is due to happen on several occasions, namely, 29 March, 12 April, 31 October and now, potentially, 31 January. All of this is taking place during some seasonally important parts of the year for different sectors of the industry. Companies have just had to deal with that. In terms of some their long-term planning, it has impaired much investment by businesses. On the other hand, it certainly made many of them begin to work on market diversification. Where the UK was an easy market to work, if that was their sole market, they would have expanded into other markets as well.
We have our own cost competitiveness index that we use to measure the broad cost environment in which companies are operating. We exclude raw materials from that because they are priced generally, regionally or internationally. The second thing we measure is currencies. What we found was that, since 2015, for companies selling into the UK market, their cost competitiveness deteriorated by 30%. Of that, 10% was due to a rising cost base in Ireland caused by a hot economy to put it mildly. The other 20% has been due to the depreciation of sterling. It has come back a little bit but that is what companies have faced. That has had significant impacts back along the supply chain.
Some of our focus in our submission to the committee and in our pre-budget submission has been what can be done to support companies to make them more cost competitive. From the Government, we see various initiatives such as the lean manufacturing scheme. They need to be supplemented by more state aid supports in terms of capital investment in companies to ensure they can bring more efficiencies to the manufacturing processes and lower the cost of production. Over the longer term, there is nothing we can do about currency. We are part of the eurozone and the UK has a different currency. Companies have to deal with that but we want to be able to deal with it from Ireland rather than transferring manufacturing operations to the UK.
Mr. Paul Kelly:
We would hope to see that. We have seen it come from 91p back to 86p or 87p. It stayed at that level over the past week. If we move into much more political certainty and get the withdrawal agreement over the line, there should be an improvement. The extent of the improvement remains to be seen. What is becoming clearer is that, while there is relief or the potential of relief that this revised protocol may hopefully be ratified by the UK Parliament and then by the European Parliament, the future trading relationship will look like a hard Brexit. That is not going to be particularly beneficial economically for the UK and certainly will not be for us. There are several points traders will need to digest. We should see further improvements in the exchange rate. The extent of it, however, remains to be seen.
Regarding insulating against the marketplace, it is down to how to make Irish businesses more competitive. This comes back to improving skills, improving innovation and more capital investment in businesses. In the period of uncertainty in which we remain, the big capital investments are difficult decisions for many companies to make at this stage. Product and market diversification into the rest the EU and third countries is another point. There will be different target markets depending on the part of the food sector involved.
In terms of the landbridge, as it stands, the fresher one’s produce and the shorter shelf life it has, the more compelling it is to use the landbridge. For some companies whose produce tends to be more ambient or frozen, as well as those with longer supply lines, the direct sea route may be an improving option. Companies are looking at this and doing test runs on the direct route. Ultimately, it will boil down to how the Dover-Calais pinch point will actually work.
Many of the main concerns relate to a no-deal Brexit, which would be disorganised and chaotic. If we have a transition period of sufficient duration, which effectively will be business as usual, and if we can then move on to an organised free-trade agreement environment, we should see a lessening of the concerns about landbridge. There is one proviso, however. If the UK is outside the customs union, we will still face substantial customs administration. That customs administration will impose costs on businesses, both in terms of paperwork and delays. The form those delays will take remains to be seen. They will not be as bad as a chaotic no-deal Brexit. However, there will be checks at all the relevant borders. As we progress through this and as the free-trade agreement starts to take shape, we will be able to assess the impact on the landbridge and make decisions at that point.
On the specific issues raised by Senator O'Reilly in respect of the beef sector, there is a beef task force agreement. One hopes that it will get the opportunity to hold its first meeting in due course. That is the route for the entire sector to address these issues.
Overhanging everything, however, are some fundamental issues with a weak UK market and the sterling issue, which I mentioned earlier. Having said that, there was very good news on market diversification earlier this week with the announcement of 14 additional beef plants gaining access to the Chinese market. It is worth acknowledging the efforts of all of the industry, particularly the market access efforts. It is also worth acknowledging the resources the Department has devoted to this. There has been a widening of the market, and that will be important. A lot more work will need to be done on market diversification.
I acknowledge the point regarding the number of the regions whose economic outputs are below the Irish average. Senator Mulherin alluded to this in the earlier session. The regions in question are the most exposed. We have touched on this briefly in our statement and in some of our earlier analysis of the exceptional case for state aid. It very easily points to the fact that a number of these regions are exposed economically and will need support. It would certainly be the case in a no-deal scenario but we argue that, as the deal is currently framed, many of those supports will still be needed.
Will the transition period, if and when we get to it, involve more of the same in terms of uncertainty, or will the companies might view it with a little more positivity and move on to their next phases of development, which some have been shelving because of uncertainty?
Mr. Paul Kelly:
The transition period, as currently framed, will last until the end of 2020. Based on the developments over the past 24 hours, we could see the extension until the end of January 2020, which will leave an 11-month transition period that is totally insufficient. Everybody is well aware that free trade negotiations take many years. There are a couple of points to bear in mind on the United Kingdom. They were also alluded to in the first session. There are a number of sensitive topics over and beyond agrifood. In any free trade agreement negotiations, agrifood tends to be one of the major stumbling blocks, resulting in significant delays. Many of the level playing pitch issues surrounding matters such as state aid, competition law, employment legislation and labour legislation may be contentious and will, I believe, result in the negotiations continuing for a significant period. Unless there is certainty on a transition period of sufficient duration to address these sorts of issues, therefore, it will result in considerable uncertainty for businesses. As it stands, looking at the transition period in isolation, it is a matter of business as usual. Most businesses, however, operate over a timeframe measured in years rather than months. They, therefore, need certainty measured in years rather than months in which to do their business properly.