Brexit – What's next?

UK will leave the EU by 2019 Photo © brexit-1478082_640.jpg

The British voted by a  small majority to exit the European Union. That has consequences for the  wider economy and for the EU. The wholefood industry has so far shown itself to be not particularly worried. Can that be right? After the British decision to leave the EU companies in other industries set up crisis management teams or at least working groups to assess the impact, but in the  wholefood sector most firms are operating the principle of 'business as usual'.  In fact, there are many  questions to be addressed, and they affect the organic sector too.

By voting for Brexit the British forfeit all the advantages that accrue from membership of the EU, from farm subsidies, freedom to choose where to work to free trade. “At this point in time it's too early to say whether this will give rise to a change in the offer of goods or the price of organic products in Britain and the EU,“ says Elke Röder, the managing director of the Bundesverband Naturkost Naturwaren (BNN). It's important, because turnover falls if the end customer won't accept rising prices.

In Britain itself the organic sector sees hard times ahead. “All British producers and traders who want to do business with the EU will have to abide by EU organic legislation,“ explains IFOAM, the international association of organic farming movements. They already have to comply, but they do so under better conditions. Before the referendum, the licensing organisation OF&G was already warning the British that they would lose their right to participate in deciding issues of regulation. The head of OF&G, Roger Kerr, fears there will be economic impacts as well: “Organic is a strong and expanding sector in Europe and we're worried whether the opportunities this presents will be as freely available to British companies once the United Kingdom has left the EU.“

The British organic market is developing well. Graphic © Soil Association.

Few goods from the UK – but an important export market

It's true that the volume of goods from the UK to the Continent is comparatively small. “It is, however, an important export market for processed products. Nevertheless, I can't see any particular difficulties at the moment,“ maintains Peter Röhrig, the managing director of the Bund Ökologische Lebensmittelwirtschaft (German Organic Food Association BÖLW). Hardly anybody is concerned about the possibility of tariffs that, after exiting, the country could put on products from the EU. “That seems unlikely and tariffs would apply to competitors in other EU states as well,“ says Röhrig. At Weleda too they are taking it calmly. Britain accounts for around three percent of the natural cosmetics company's turnover. “So we're not anticipating Brexit will have any direct effect on our business,“ is the reassuring message from company spokesman Theo Stepp.

The manufacturer Rapunzel does hardly any business with the UK. “So Brexit won't affect us very much,“ is how Managing Director Andreas Wenning sees the situation. This also means that the UK leaving the EU will not lead to higher prices for the company's products. Other manufacturers with business relations with Britain, like Allos and Holle, had not responded to our enquiry by our deadline for publication. For Dennree it is too soon after Brexit and they need more time to respond.

More infornations on the developments of the British organic sector find here. Grafic © Soil Association

“It has never been easier to lose pounds“

But it's not only direct trade relations that are impacted by Brexit. After the vote to leave the value of the pound sterling fell by more than ten percent and reached its lowest level since 1985. “It has  never been easier to lose pounds,“ somebody in the financial sector joked . However, at the same time the euro also came under pressure against the US dollar. Actors in the financial markets are assuming that Brexit will have a negative effect on the rest of the EU.

A lot of business is transacted in US dollars, including in the wholefood industry. Examples are imports of cocoa, groundnuts and tropical fruit, and coffee, coconuts and palm oil are, of course, not produced in the EU either. Importers still don't seem to be worried. The sometimes violent fluctuations on the money markets are dismissed as short-term reactions that balance out over a longer time-scale. But it could happen that in the medium term the price structure will adjust as the exchange rates settle down at new levels. If it get too expensive we could expect a fall in demand.

British “Limited“ still possible?

People clearly affected are workers and entrepreneurs who are British citizens and work in  Germany. According to the EU, after Brexit they are likely to need “a permit for residence in Germany for the purpose of gainful employment.“ Some entrepreneurs have chosen the “limited“company form in keeping with British law. A limited company is easier, quicker and less costly to set up than a GmbH, and it was possible only because Britain was a member of the EU. “Anyone who has opted for it may well have to convert the company after Brexit to a GbR or a GmbH, which would of course add to their costs,“ Röhrig explains.

Numerous representatives of industry also assume that Britain will leave but, like Norway or Switzerland, will still be closely linked to the Eu, so that there will not be any great change. That could be a dangerous conclusion to draw, because it's being said in the policitical world that they want to send a clear message and make the British feel the negative consequences of leaving. The thinking behind this is that it will prevent EU opponents in France, Austria, the Netherlands and other states from following suit and having the same success – so that “What's next?“ doesn't become “Who's next?“ This is why people in the wholefood industry should keep a close eye on what approach is being taken and prepare themselves well in advance for the consequences. “Basically, a similar situation applies to the organic industry as to other business sectors,“ Röder warns.

Comment: "No time for tea"

Achtung, Achtung! The British want to leave the European Union. The warning lights are flashing in the world of politics and business. Everywhere the mood is one of crisis. Everywhere. Well, almost. For the wholefood industry Brexit is no reason to interrupt lecture tours or cancel company outings. “We'll wait and see what happens“ - this describes the mindset of the industry perfectly. Sit back, wait and drink tea. This is a dereliction of duty to customers, employees and your own company. The global economy is like a mobile that a breath of wind can set in motion but, if one weight is removed, the whole thing tilts and the balance is lost.

There's no need for a frenzy of activity, but the time has come to ask yourself a few questions.

For example: What precisely does the decision of the British mean for me? Have I got relevant products in my range? What trade relations are affected? Am I a customer of a British bank? And above all else: Where can I get information if I've got questions on precisely these issues and need answers quickly?

Many products on the shelves are not local or regional. We all know coconuts, groundnuts, cocoa, bananas and mangos aren't grown in the EU, but distortions in the market can arise in this segment because the wholefood industry is tied to world market prices. When the exchange rates for dollar, pound and euro, etc. settle down at new levels, products are going to get either more expensive or cheaper in the long term. If the economic fallout means that people have less money in their pockets, how much they will spend on (specialist trade) organics and what margins retailers will have are unknown quantities.

Nobody knows what will happen. All we can be sure about is that as soon as the British declare they are leaving the EU we've got precisely two years. Extending this deadline is possible only with the unanimous agreement of the European Council, which is unlikely. But will the British exit the EU rapidly? Will they take their time? Is it even possible they will back down and not exit the EU?

Whatever they decide, each of these possibilities will have economic repercussions and all traders ought to be well prepared. Once they are prepared there will still be time to sit back and drink tea.

Author: Jochen Bettzieche is journalist specialised in economics and sustainable investment