Britain’s decision to leave the European Union threw key trade deals in jeopardy while sending shock waves through global financial and commodity markets last week.
Most equities and commodities, including wheat, corn and soybeans, dropped sharply in trade the day after the June 23 referendum, while traditional safe-haven investments like gold and the U.S. dollar rallied as investors came to terms with the referendum’s surprise outcome.
“Make no mistake about it: Brexit was a huge change in the macros,” Charlie Sernatinger, global head of grain futures at ED&F Man Capital, said in a note to clients. “It is going to change a lot of hedge fund ideas about the dollar and how to position themselves in commodities.”
Reaction to the British vote added pressure on grains that were already weakened by rain relief for corn and soybean crops in the U.S. Midwest. As the week ended, corn was down 12 per cent, its biggest weekly decline in three years. Soybeans were down 5.6 per cent and wheat was down 3.3 per cent.
“The upset of sorts… has the global marketplace in turmoil, with the U.S. dollar spiking and commodities getting killed,” Matt Zeller, director of market information at INTL FCStone said in a note to clients.
In the longer term, the narrowly won Brexit vote jeopardizes the Comprehensive Economic and Trade Agreement (CETA) and is expected to put a similar negotiation between the EU and the U.S. on ice, analysts said.
“If you’re a processor looking at the 80,000 tonnes of pork we were supposed to get under the CETA deal, maybe don’t break ground on the new plant just yet,” said the University of Guelph agricultural economist Al Mussell in an interview.
If you can consider the agreement to be a spreadsheet, removing Britain has changed every value in every cell.
“That’s going to make for some uncertain times, some unclear numbers and delays. It will also likely mean any of the positive aspect of the deal will be pushed back, though how far is anyone’s guess,” he said.
“It really is an unprecedented situation,” Mussell said. “The agriculture and food sector, as well as other industries of course, is vulnerable to major socio-political shifts, and that could well be what we’re undergoing here.”
He said exit negotiations will be difficult. If the EU takes a hard line against the U.K., it could make the situation worse. If it deals too softly with the British, other member-nations may also choose to exit.
“They’re really on a knife-edge,” Mussell said.
One strategy would be for the U.K. to leave the EU, but more or less simultaneously sign a free trade agreement with it. That could be the best possible outcome, but Mussell admits no one can assign a reliable probability for it happening.
On the other end of the spectrum is catastrophe, something akin to the economic crisis of the 1930s. It might seem a stretch, but Mussell said seemingly innocuous protectionist moves at the time are ultimately seen as the match that lit the fuse and exacerbated a bad situation.
“We could be looking at something similar here,” Mussell said. “Most economists now say the Smoot-Hawley tariff, in 1932, is what really caused the Great Depression, and nobody at the time could have predicted that.”
Canadian trade analyst Peter Clarke said the Brexit vote sends a signal to EU governments about voter frustration and anger. “I expect that the commission will be far too busy trying to shape a new relationship with the U.K. to focus on CETA or TTIP (Transatlantic Trade and Investment Partnership between the U.S. and EU). Even if the U.K. only pulls the trigger in October, work and consultations should have started yesterday,” he said.
Cam Dahl, president of Cereals Canada, said in addition to the impact on trade deals such as CETA, there are also a number of key decisions on agriculture products, such as relicensing glyphosate and approval of GMO soybeans that could be sideswiped by the Brexit vote.
“It remains to be seen if the EU continues to be engaged in these processes, or if they become more inward focused,” Dahl said in a telephone interview.
Whether this is a short-term blip or a more meaningful fork in the road is still unclear, he said.
Rick White, CEO of the Canadian Canola Growers Association, happened to be in Germany for a meeting in the days before the vote, which included representatives from major EU member nations including the U.K., France and Germany.
“There was a real air of uncertainty,” White said. “The German and French delegates were very clear the U.K. needed to stay in, and the U.K. delegates were saying nobody knew how the vote would go.”
Now that an exit vote is a reality, White expects the uncertainty to continue for the foreseeable future. For U.K. and EU residents that means no clear picture of how things will settle out. For farmers there it will mean questions about the fate of the bloc’s Common Agriculture Policy and whether the U.K. will move to replace it. For Canadian farmers it means the CETA deal is now up in the air, and that policy decisions like relicensing glyphosate or approving GM soybeans drop down the agenda.
“EU politician are likely to be very preoccupied with managing this situation, and issues that are important to us will drop down the agenda,” White said.
He also noted that the U.K. frequently acted as a moderating influence on EU policy, particularly policy affecting agriculture.
“In a lot of ways they were almost an advocate for countries like Canada,” White said. “They had a similar view of adopting technology and making science-based decisions. Without them, there is the risk the EU will veer a bit further in this direction.”
White said he’ll be watching the trendline of the market gyrations, rather than the day-to-day swings, to get a clearer picture of how things are playing out.