A few thoughts by John Nalivka: Brexit – revolting against Brussels and the bureaucracy
July 7, 2016
Are you overwhelmed by bureaucrats? Don't feel like the Lone Ranger! Fifty-two percent of Great Britain's voters showed there weariness of the European Union's bureaucracy in Brussels and voted to exit the 40 year old alliance. Thus, we have the acronym Brexit.
Great Britain did not join the European Union when it was first formed after WW II and in fact, did not apply for membership until 1961. They were not admitted until 1973 and it has been a rather contentious relationship before and after. There is ample discussion and debate with regard to Britain's expectations when they joined the EU, but their recent action to leave suggests or even indicates that those expectations were not met. Certainly, our own political landscape suffers from the same weariness of bureaucrats and politicians. Who can find fault with a revolt against bureaucracy?
There are plenty of opinions about where Britain's exit from the EU will ultimately lead and this extends to speculation that the EU's days are numbered now. This is mostly speculation at this point and until the dust settles, the impact of Brexit is mostly unclear. Of course speculation has led to market volatility. Maybe that is the best assessment – simply volatility as financial markets sort out, rebalance, and adjust. The entire exit process will take at least two years according to experts.
There is the issue of exchange rates which in today's world of global trade, is significant. Immediately following the vote, the British pound weakened to its lowest level since 1985 which will be positive for their exports while increasing the cost of imported goods including materials imported to manufacture those export goods.
In terms of U.S. red meat and poultry exports (volume), the EU is pretty insignificant representing less than 1 percent of U.S. pork and poultry exports and only 3 percent of U.S. beef exports. In contrast, Asia accounts for 59 percent of U.S. beef exports, 42 percent of U.S. pork exports, and 20 percent of U.S. poultry exports. So, again, the real impact will be the direction of the dollar and its impact on U.S. red meat and poultry trade outside Britain and the EU. The U.S. is negotiating to create the Transatlantic Trade and Investment Partnership and this agreement is likely more difficult now. Also, we will have to negotiate a separate trade agreement with Great Britain.
It is my opinion that even in the face of this volatile situation, markets will largely be driven by supply-demand conditions that were in place prior to Brexit and those conditions paint a picture of lower prices for grains, red meat, and poultry products.