Category: Policy & Business

Northern Ireland Protocol Wrangling

On 17 May, the Foreign Secretary, Liz Truss, made a statement in the House of Commons on the Government’s intention to introduce legislation to make changes to the Northern Ireland (NI) Protocol.  During her statement, the Foreign Secretary stated that her preference remains a negotiated solution with the EU.  To this end, she invited European Commission Vice-President Maroš Šefčovič to a meeting of the Withdrawal Agreement Joint Committee.  However, she also said that various aspects of the Protocol are not working.  She stated that the new Bill would address these issues whilst claiming it would also uphold the provisions of the Good Friday Agreement and be consistent with international law – points that the EU, in particular, disagrees with.

The new Bill, due to come before Parliament in the coming weeks would focus on addressing issues around;

  • The movement of goods: particularly relevant to agri-food, where the Protocol is not yet fully functional in some areas as a result of the grace periods already put in place by the UK Government for products such as sausages and mince
  • Goods regulation: also of relevance to agri-food, and concerns NI having to follow EU rules for goods which has precedence in NI over rules that the UK might introduce in the future (which could diverge from the EU)
  • VAT: NI remains within the EU’s regulatory orbit for VAT on goods
  • Subsidy control: the EU’s State Aid rules are applicable to NI and, in some instances, British based companies that do business in NI.
  • Governance: this links with the oversight that the European Court of Justice has over the NI Protocol.

The Foreign Secretary stated that the Bill would include a Trusted Trader scheme, effectively a ‘green channel’ for goods imported from GB and staying in Northern Ireland.  It would also encompass the provision of real-time data to the EU with the intent of giving them confidence that goods intended for NI do not enter the EU Single Market, via the Republic of Ireland.

A dual regulatory regime is also suggested so that NI could follow UK rules for goods that would stay in Northern Ireland.  Effectively, businesses would choose between producing goods to UK or to EU standards in Northern Ireland.  Liz Truss also stated that robust penalties would be imposed for those seeking to abuse the proposed new system and promised further detail in the coming weeks.

Unilaterally disapplying key parts of the NI Protocol via UK legislation has the potential to place the whole post-Brexit trading arrangements between the UK and the EU in jeopardy.  Whilst the EU has been somewhat muted in its response, Maroš Šefčovič clearly stated that the EU would respond ‘with all measures at its disposal’ should the UK follow through and enact legislation to override the NI Protocol.  However, we remain several steps away from retaliatory action being taken.

If a Bill is brought before Parliament in the coming weeks, it needs to go through Parliamentary approval process.  Most believe that the House of Lords would almost certainly vote against the Bill.  This would mean a delay by one year to the Bill’s enactment.  Some suggest that 20th June 2023 to be a potential key date, if the Bill gets to the final House of Lords vote by 20th June this year.

This gives some time for the UK and the EU to reach a negotiated solution. For agri-food businesses, it is unlikely that much will change in the interim.

There is a delicate balancing act required between the UK seeking to rewrite large chunks of the Protocol on the one hand and the EU Commission not having the mandate from EU Member States to renegotiate the Protocol on the other.  That said, there is the scope for all parties to improve the Protocol and this must be the focus.

As we have stated in the past, a veterinary agreement between the UK and the EU would go a long way towards addressing the most problematic Protocol issues around the movement of agri-food goods between Britain and NI.  This could be along the lines of the veterinary agreements that New Zealand has with the UK and the EU.  This would still give the UK the ability to negotiate free trade deals with third countries.  It would mean that some checks would remain, but at greatly reduced levels (e.g., 1% physical checks versus the default 15% for red meat).  The DUP NI Agriculture Minister, Edwin Poots, has suggested a similar concept in the past. 

It is most likely that a way will, eventually, be found to muddle through the current issues as this is what has occurred with the Brexit process to date.  We are probably into the territory of having Protocol 2.0, 3.0 etc. in the coming years.  This will most likely align, to some degree, with the vote that the NI Assembly will have on the Protocol every 4 years.  In some ways, this would be akin to new versions of MS Windows that Microsoft brings to the market periodically – each new version is fundamentally the same operating system (Protocol) but with scope for improvements, even if certain aspects remain imperfect to some. 

Further detail on the Foreign Secretary’s Statement to the House of Commons is available via: https://www.gov.uk/government/speeches/northern-ireland-protocol-foreign-secretarys-statement-17-may-2022

Inflation

The headline rate of inflation jumped to 9% in April.  The Consumer Prices Index (CPI) recorded its highest level of increase since the early 1980’s in the 12 months to April 2022.  According to the Office of National Statistics, almost three-quarters of the rise in the CPI index can be accounted for by increases in energy costs.   However, food costs are another major source of inflation.  The specific CPI Food index showed price growth of 6.7% in the 12 months to April.

This rise in ‘general’ inflation will be felt by farm businesses eventually as many of the ‘overhead’ costs such as labour, fees, office costs etc. are closely linked to the cost of living.  However, agriculture has its own set of specific costs – many being linked to commodity markets such as grains, oils and gas.  We have complied an ‘agflation’ index to represent this.  This uses Defra Agricultural Price Indices for agricultural inputs and weights each category of input (e.g. animal feed) by the overall spend by UK farmers.  We fill in some gaps not covered by the Defra series and also provide some up-to-date estimates for the latest months (the official figures work some months in arrears).   The chart below show CPI along with our agflation index.  It can be seen that farm input prices are estimated to have increased by over 30% year-on-year in April.

Queens Speech

The Government has set out its legislative agenda for the next Parliamentary session in the Queen’s Speech (given this year by Prince Charles).  A number of proposed bills will have a potential impact on farming and rural areas.  The Genetic Technology (Precision Breeding) Bill (England) is designed to allow the commercialisation of plants and animals derived from gene editing.  Gene editing is selectively using the genes already present in an organism so is different from genetic modification.  The Government seems keen to ‘fast-track’ this legislation, with the Bill being introduced into Parliament on the 25th May.  It is hoped that it will become law by the end of the year.  The focus will initially be on allowing plant breeding with the aim of producing crops that are higher yielding, more resistant to pests and diseases, less affected by climate change and are better users of nutrients.

The Levelling Up and Regeneration Bill contains a grab-bag of policies designed to implement the Government’s ‘big idea’.  Whilst this includes some reform of the Planning system, the proposals are watered-down compared to those in the Planning White Paper of 2020.  There will be a Renters Reform Bill which will limit Landlords’ right to regain possession under ‘section 21’ notices.  With the number of surplus ‘farm cottages’ now rented out on the private market, this could have an impact on farm businesses.

The Animal Welfare Bill, which bans the live export of animals other than for breeding, will be re-introduced as it had not completed its legislative process during the last session.  One piece of legislation notable by its absence was a Food Bill.  This had been promised, in response to the Dimbleby Nation Food Strategy report.  Instead a White Paper on the food chain is to be published.  This has been delayed a number of times, but is now expected in June.  It may be a fairly ‘high-level’ document containing broad policy aims, rather than much detail on the implementation of a food policy.

 

Farm Profits Rise

Total Income from Farming

UK farm profits improved by 14% in real terms between 2020 and 2021 according to Defra.  The latest figures for Total Income from Farming (TIFF) were released on the 12th May and show that returns increased to £5,998m – the third highest in the last 20 years.   TIFF is the aggregate profit from all UK farming businesses for the calendar year.  It shows the return to all entrepreneurs for their management, labour and capital invested.  In simplistic terms, it is the profit of ‘UK Agriculture Plc’.

Output from both the arable and livestock sectors was higher during the year which offset a rise in costs.  Total crop output increased by 20%, whilst livestock sales were up 7%.  Costs increased by 12% compared to the 2020 year (and, of course, have gone up considerably more since).

This data is a ‘provisional estimate’.  There are often quite large revisions in the figures – both when the second estimate is published in December and when the final figures are produced in a year’s time.  For example, the first estimate of TIFF for 2020 was £4,119m.  This was then revised upwards to £5,121m in December before now being put at £5,242 (all figures in current prices).  We would not be surprised to see an upwards revision in the 2021 figures too – most sectors, with the exception of pigs and horticulture, had a pretty good year.   

The chart below shows the evolution (in real terms) of TIFF over the past 25 years.  Also included is the average £ / € exchange rate for the year, which is one of the key drivers of overall farm profitability.  Also shown on the chart is the contribution of direct support (BPS plus agri-environment scheme payments).  This continues to contribute a sizeable proportion of farm profits.

On the chart is an estimate of TIFF for the current, 2022, year.  A sizeable drop is forecast.  Despite output prices being generally high, increased costs will result in lower profitability.

The full Defra TIFF data can be found at – https://www.gov.uk/government/statistics/total-income-from-farming-in-the-uk

Balance Sheet

Alongside the TIFF figures, Defra also published an updated Balance Sheet for the industry.  This shows the Net Worth of farming at the end of 2021 as being £285.6bn.  This is a 1% increase on the 2020 figure and shows a rise of 9% (in real terms) over the decade from 2011.  The main driver of the increase in asset values is the land price.  After falling in the mid-2010’s, land has now shown an increase in value for the past four years

Glyphosate Availability Extension

Glyphosate is likely to remain available to British farmers until at least 2026 as a result of a decision by EU regulators.  The EU approval for the herbicide was due to expire on 15th December 2022.  However, due to the plethora of responses to public consultations, it has been decided to delay any decision on an extension until ‘mid 2023’.  A temporary approval will be granted by the EU whilst it considers the issues.

The UK Government had previously announced an automatic three-year extension for any active substance with an EU licence expiring between 1st January 2021 and 31st December 2023.  Even if glyphosate was banned in the EU from mid-2023 therefore, farmers here could continue to use it to at least mid-2026.  With a separate GB plant protection product (PPP) approvals process being introduced, it is possible glyphosate could remain in use in the Britain after that date, even if it were banned in the EU.  (This would likely cause some friction in trade terms, however).

The situation is different in Northern Ireland.  EU PPP legislation remains in place, under the terms of the Northern Ireland Protocol.

Business Models Handbook

A new guide to joint ventures in farming has been released.  Called ‘Business Models to Unlock Future Farming Potential’ it covers such arrangements as licences, tenancies, contract farming, share farming and cooperative arrangements.  It has been produced by the Agricultural Productivity Task Force (APTP).  Getting resources (notably land) in the right hands and encouraging farmers to work together is seen as a key way of improving the performance of the sector.  The guide can be found at – http://fdsc.org.uk/fdsc/documents/business-models-to-unlock-future-farming-potential-handbook.pdf.

New Season Fertiliser Price

CF Fertilisers issued its new season price for nitrogen fertiliser this month.  The starting price for Nitram (34.5% ammonia nitrate) wass between £630-£640 per tonne on-farm.  This was for bulk bag delivery from May to July.  This initial tranche was quickly sold out.  Prices for September deliver are now around £710-£720 per tonne on farm.  The new-season nitrogen price had been a source of much speculation, given the huge increase in prices seen over the past few months.  This price came in at the lower end of expectations.  There is likely to be an element of the manufacturer trying to stimulate demand – its facility at Billingham has continued to produce nitrogen but UK sales have been muted.  Volumes have been exported and stored.  Gas prices have recently reduced from their previous highs.  The economics are likely to favour producing fertiliser during the summer months when gas prices are lower.  Unless there is a sudden shift in the political situation in Ukraine, then a quick fall in gas prices back to past levels looks unlikely next winter.  Those that ‘hang on’ to wait for cheaper fertiliser later may be disappointed.  Buying this early does generate its own working capital and storage issues however.  

 

 

Advance Payment of BPS

English farmers will get a 50% BPS advanced payment this year.  Defra has emailed all BPS applicants to inform them that they will receive an advanced payment from the end of July with the remaining balance when the usual payment window opens in December.  The Department also confirmed that this two-part payment structure will be a permanent change for the remaining years of the BPS.

The advanced payment will be half of the estimated value of a businesses’ BPS payment and will be made to those who have made eligible application by 16th May.  Unfortunately cases that are in probate will not receive advanced payment.  Payments are expected to be made from the end of July and throughout August.  Defra has said advanced payments are being made in recognition of the increased pressure on producers’ cash flows due to the spike in input costs. 

 

Base Rates

The Bank of England increased the Base Rate by a further 0.25% on the 5th of May.  This takes the cost of borrowing from 0.75% to 1%.  This is another attempt to respond to increasing inflation which is being exacerbated by the Russia-Ukraine conflict.  The Bank is tasked with keeping inflation at 2% but, according to the Bank’s own forecast, increases in prices would rise above 10% this year.  The rise in interest rates is meant to bring inflation back towards the target over the medium term.  Many forecasters believe that there will be at least another 0.25% price rise before the end of 2022, taking rates to 1.25%.

Rural Economy

The rural economy is underperforming due to a lack of productivity – with rural areas being 18% less productive than the national average.  This finding comes in a report from the All-Party Parliamentary Group (APPG) on the Rural Economy and Rural Powerhouse, backed by the CLA.  It calls on the Government not to ignore rural areas in its policy making and thus waste the economic potential of these areas.  The report makes recommendations in six main areas;

  • Planning: too often the prevailing sense is that rural areas must be ‘preserved’ with a inherent bias against development that could improve economic activity
  • Tax: making the taxation system more aligned with the types of businesses seen in the countryside – i.e. smaller, family-run, more diversified etc.
  • Connectivity: improving rural broadband and telecoms and improving digital skills
  • Farming: addressing issues around labour shortages, trade deals and investment
  • Skills: ring-fencing funds for rural areas under the Shared-Prosperity Fund (SPF).  Making skills training relevant to rural areas
  • Processes: ensuring Government departments take account of rural issues in their policy-making

The full report can be found at – https://www.cla.org.uk/library/levelling-up-the-rural-economy-an-inquiry-into-rural-productivity/ .