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Vine Notes

Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, N.A.

Vine Notes is a monthly column by authors from Rabobank and Farella Braun + Martel.

The vote for Brexit — Britain’s exit from the European Union — has clearly become a hot topic for the global wine industry, as the United Kingdom is one of the world’s largest markets for imported wine by volume.

The fallout from the vote will have critical implications for the global industry, and wineries in the EU will feel the effects most directly. There also will be tangible knock-on effects felt in nearly all major wine-producing regions. The prospect of such an important import largest market country leaving its free-trade agreement with the world’s largest wine-producing region will have an obvious impact on trade flows in the long term. But the marked devaluation of the British pound will begin to drive some of those changes almost immediately.

The EU is, by far, the U.K.’s largest supplier of wine. France, Italy and Spain alone supplied 60 percent of British imports last year. Assuming a soft British pound reduces demand for wine imports, those wines will need to find new markets. EU suppliers are expected to redouble their efforts in other markets, such as the U.S. and China, which will impact domestic suppliers as well as other foreign competitors.

PREPPING FOR A POUNDING

The most immediate concern Rabobank sees is the devaluation of the British pound (GBP). It continues to trade lower against the U.S. dollar and euro, compared with its average trading level in early 2016. Many major wine suppliers to the U.K. will have foreign exchange forward cover in place to see them through the next six to 12 months. But they will need to closely monitor where the pound will be trading beyond that horizon and how sustained depreciation may feed through into higher wine prices and lower demand.

Another consideration is that over time, prices of products might change because of the pound’s weakness. But this will lead to the normal tension between potential sticker shock to British consumers, if the currency impact is passed on, or margin pressure for suppliers, if it is not.

COMING TO TERMS WITH TARIFFS

As a result of the vote, the U.K. will be forced to renegotiate terms with the EU and other trading partners, but it is unclear what the new trade agreements will look like. It might be possible for the U.K. to strike deals that are more aligned with its own interests, once it is outside of the EU.

The EU has to consider the interests of all its member states. On occasion, it has offered a trading partner a deal that benefited other EU members, but not necessarily the U.K. That said, the U.K. is a much smaller, less-attractive market on its own, compared with the entire EU. In that sense, it loses some of its negotiating leverage with its trading partners.

In the case of wine, the Brexit vote clearly creates the most risk for suppliers in the EU and potentially opens up opportunities — at least, in a relative sense — for other partners. As the EU currently enjoys zero tariffs on exports to the U.K., EU suppliers can only hope to maintain the status quo, but the risks are all to the downside. In other words, they cannot hope for better terms than they currently enjoy. Depending on the terms of new trade agreements, suppliers that currently have higher tariff rates may end up with more favorable terms.

Vine Notes

Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, N.A.

Vine Notes is a monthly column by authors from Rabobank and Farella Braun + Martel.

ECONOMY OF CERTAINTY

The broader impact on the U.K. economy poses more medium-term considerations. Ongoing uncertainty would be expected to weigh on business investment and consumer sentiment and spending. Those, in turn, would lean on employment and average wage growth, which was only just beginning to rise in the leadup to the vote. With the chances of a shallow recession in 2017 rising, downside risks to wine-consumption growth are also higher.

These macro issues notwithstanding, the most significant questions for the U.S. wine industry are when will the U.K. will leave the EU and on what terms, whether EU wines maintain tariff-free status and whether the U.K. aggressively pursues free-trade agreements with non-EU trading partners. At this point, we still have some big questions and very few answers. Only time will tell.