There are two Irish food industries. The first encompasses the physical production and processing of food on farms and in factories around Ireland. The second is a set of companies and co-ops that have developed global organisations with a wide range of products and distribution assets across the world. While the two ecosystems overlap, they face differing challenges and opportunities that have been brought in to sharp focus by Brexit.

Imagine the physical production of food in Ireland as a single company. It would be comprised of a number of divisions that specialise in processing milk, meat, grains and fresh produce on more than 120,000 farms and in a myriad of production facilities throughout the country. It is a large business, with headline revenues of over €9.5 billion. Over the past five years it has recorded solid growth as a combination of a recovering Irish economy, benign exchange rates and the unshackling of supply limits in the core dairy division have all combined to produce a rise in turnover and cashflow.

This rosy picture, however, has structural weaknesses underneath. It is a fact that food processing in Ireland, whether in the larger factories or on small sites, operates with wafer-thin margins. On top of that there is, in aggregate, a huge dependence on the critical UK market for success. More than 40 per cent of Irish food is exported there.

Brexit has created a mother lode of turbulence and volatility for everyone involved in the Irish food industry. Aside from the byzantine process involved in extracting Britain from the Common Agricultural Policy (Cap), and the related consequences of WTO-driven tariffs and duties, there is an immediate and real danger already unfolding from sterling’s slide against the euro. When you combine a 15 per cent fall in the sterling to euro exchange rate in just four months with an export-dependent sector that lives off low profit margins, the consequences can be ugly.

Global businesses

While that dynamic is unfolding there is another Irish food industry at work. A set of private, co-op and stockmarket-listed Irish agrifood companies have developed significant global businesses over the past decade. There are eight Irish food companies listed on the Dublin and London stock exchanges that have a combined equity value of almost €24 billion. These businesses have spent the past two decades forging international footprints that have diversified their earnings base and built higher-margin activities. This has insulated them to an extent from the Brexit hit.

For a number of Irish co-ops and privately-owned companies their relative dependence on Irish-produced food sold to the UK has made Brexit and sterling a more pressing issue. Many of these have invested heavily in processing facilities in Ireland that are inextricably connected to that activity which is so dependent on the UK marketplace. Their scope to manoeuvre around the political and economic challenges caused by Brexit is more limited than those who have built true global businesses.

There are profound consequences to be weighed up as Irish politicians and policymakers consider how Brexit will impact Irish food. In the short term, an extended period of weak sterling would push thinly-financed SMEs in particular towards merging or closure. It will pose problems too for the beef sector where narrow processing margins feeds quickly back to badly-financed primary producing farmers. The declining trend in farmer numbers evident for over four decades will be amplified further, I fear, if a period of poor prices is upon us.

At a deeper level, extricating the UK from the Cap seems like a deeply troubling process. The UK has a long record of pursuing a cheap food importing policy, with farmers having a weak political voice. There will be a temptation to pursue supposed cheap imports from former colonial sources including Australia and New Zealand (dairy) and parts of Africa and Latin America (meat). That "vision" will encounter ferocious resistance in Europe, which may lead to a whole new level of tariffs and duties that stifle and obfuscate trade while a new relationship between the UK and Europe is shaped.

Small, open economy

Ireland, by definition, is a small and open economy. Anything that reverses or complicates the largely liberal existing rules around trading of food products, especially within Europe, is a new and significant threat to the wellbeing of the Irish Republic and it must be managed robustly.

Certain economic laws tend to prevail during periods of political unrest such as this. Ireland has an established comparative advantage in producing grass-based milk and meat which provides cost and food efficacy advantages at a global level. However, the farm and processing structures built over that grass system remain fragmented and inefficient. Previous periods of price instability have led to waves of consolidation that led to fewer farmers and processors producing larger volumes of produce. I suspect a similar outcome will occur as the Brexit process unfolds, leading to a leaner and more efficient industry.

Circling back to the two Irish food industries outlined above there are clear responses needed to Brexit by both: (1) the physical production and processing of food on the island of Ireland has to be elevated to a new level through a bout of rationalisation and consolidation that lowers cost and improves efficiency; and (2) co-ops and companies must future-proof their risks to a single geographic market by having international businesses that diversify earnings while improving margins and returns on capital for their owners. These are the optimal routes, notwithstanding the political challenges they pose, that Ireland should now navigate with vigour.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal