Matt Incles is a senior consultant at Promar International, a leading agricultural and horticultural value chain consulting company and a subsidiary of Genus. Here, he explains what the current weaker euro, against most major world currencies, means for the European fresh produce trade, especially UK growers and packers
Facing extremely challenging domestic market conditions and the ongoing ban from trading in Russia, many of the larger European Union (EU) fruit and vegetable distributors have developed strategies to enter and develop other markets in regions of the world, such as Asia, the Middle East and Africa.
If EU packers and exporters can harness this opportunity, it should drive demand back up the supply chain to support an increase in horticultural production in the leading growing countries across the European continent, such as Spain, Italy, France, Poland and the Netherlands.
One of the fundamental prerequisites of entering international markets is, of course, the basic level of competitiveness to do so. Unless companies can supply products and services to the market at a competitive price, the chances of any real meaningful success are likely to be very slim.
It is worth remembering that Europe faces tough competition in these emerging markets from other major producing regions of the world, in particular the likes of Chile, Peru, South Africa and the US, who, in many cases have a more dominant position in these sorts of markets built over a period of time.
Weak euro has boosted EU competitiveness abroad
But Europe has an ace card and it should play it now. Structural political and economic difficulties within the eurozone have weakened the strength of the euro (€) against most major currencies, including the US dollar (US$) and the Chinese Yuan Renminbi (RMB), which sets the tone for many Asian currencies in particular.
A weak € makes European exports more competitive in international markets. And with little prospect of an improvement in the eurozone economy on the horizon, Europe’s currency advantage may last for some time yet.
This is good news for price-sensitive buyers in Asia, Africa and the Middle East, who are looking more globally to source horticultural products at a more competitive cost. This became even more apparent, during a recent trip to Asia, where I saw European suppliers (benefitting from a weak €) beginning to make inroads into produce markets that are typically dominated by supply from the US, Australia and New Zealand.
It is impossible to predict how long Europe’s window of opportunity may last. Therefore, it makes sense that exporters should take full advantage of its competitiveness in the short-term, whilst also taking the opportunity to get closer to the market and buyers in order to lay the foundations for more sustainable medium to long-term opportunities.
The UK is more attractive too
A stronger economic recovery in the UK has led to a 15% rise in the value of the pound sterling (£) relative to the € in the two years to September 2015 – see Figure 1 below.
The most obvious impact of the change in the exchange rate will be to trade between the UK and Europe. Europe is, by far, the biggest trading partner for the UK. In 2014, the UK exported £19 billion-worth of agricultural, food and drink products to Europe. This is equivalent to 61% of total UK food and drink exports. The UK imported £39 billion-worth of agricultural, food and drink products from Europe. This is equivalent to 72% of total UK food and drink imports.
In the same way a weak € will favour European exporters in global markets, it will also provide a temporary increased advantage here in the UK too. Exporters from the Continent will see the UK as an even more attractive market based on this.
The current £/€ exchange rate will help suck in additional imports from the likes of France, Italy, Spain and the Netherlands – they are already large suppliers of a wide range of produce. And the traditional role of the Netherlands as a re-exporter of produce from so-called third countries or regions, such as Africa, Chile, South Africa, Peru, Brazil and Mexico will hardly be damaged.
To a greater or lesser extent, the same effect will be felt across all product categories, not just in horticulture, but also in other agri-food sectors, such as dairy, pork and a range of processed foods.
This will be a major test for all in the UK food chain. It will also place UK suppliers under even greater pressure to remain competitive against their European counterparts. It will also test the support for British sourcing policies of all buyers, in particular the retailers. And it will also be a test of loyalty for consumers.
Forge closer customer relationships
No-one really knows how long the current state of affairs will last. The movements of exchange rates are notoriously difficult to predict. However, what is far more certain is that the longer this situation exists, the more pressure the UK horticultural and the wider food industry will come under.
This will require a response from UK growers and packers to assess their position in the market and to use a wide range of technologies to reduce wastage in the supply chain and increase efficiency of production. They will also need to develop rock solid relationships with customers, in what is referred to as “customer intimacy”, and, in some cases, direct with consumers.
Getting close to the customer seems a sensible prerequisite at any time, but in the current market circumstances, it appears to be essential if the UK sector is to fend off attention from other suppliers around the world.