The Bank of England raised UK Base Rates from 0.1% to 0.25% on the 16th December. This is in response to rapidly rising inflation with the year-on-year increase in prices accelerating from 3.1% in September to 5.1% in November (CPI measure). Even with the threat of the Omicron variant to economic activity, many economic forecasters are predicting further base rate increases in 2022 as inflation pressure continues. Rates of 1% by the end of the year loom possible.
The UK-Australia Free Trade Agreement (FTA) was signed virtually on 17th December. It is the first FTA that the UK has negotiated from scratch since its departure from the EU. It means that all chapters of the agreement have now been agreed by both parties following the agreement-in-principle in June (click here for previous article). From an agri-food standpoint, much of what was agreed in principle is now contained within the detailed agreement and will now be laid before Parliament for scrutiny.
The key points relating to agri-food are;
Overall, the UK-Australia FTA is significant as it is the first trade agreement negotiated independently by the UK in nearly 50 years. The UK farming sector, particularly grazing livestock and sugar beet will be more exposed to competitive pressure from Australian imports in the long-term. However, it is worth emphasising that Australia is currently heavily focused on the Asia-Pacific region and that having generous quota access with eventual full liberalisation does not necessarily mean that Australian imports will reach these levels. That said, from an Australian perspective, the UK market is an important diversification opportunity, particularly given its recent tensions with China.
From a UK farming standpoint, the Australian FTA of course sets an important precedent, that other deals are likely to follow. We’ve already seen this with the NZ agreement-in-principle. The UK has also relented on its efforts to base beef and sheepmeat import TRQs on carcase weight equivalent. The HS codes included show that the TRQs will be based on product-specific weight. This is unsurprising as both Australia and NZ have been digging their heels in on this. They also have leverage with the UK in terms of its application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
The deal will now go before both the UK and Australian Houses of Parliament for further scrutiny and ratification. Once domestic ratification has been completed, both parties will notify each other. The agreement could enter into force as soon as 30 days after both parties have completed ratification. Some anticipate that entry into force could occur as soon as the middle of 2022, others think the process might take longer. More detail is available via: https://www.gov.uk/government/collections/uk-australia-free-trade-agreement
On 15th December, the Government announced that there will be delays to the implementation of the UK Border Operating Model as regards imports from the island of Ireland. This is due to ongoing negotiations around the Northern Ireland Protocol which will continue into 2022 and associated legal complexities around maintaining unfettered access for NI traders to the GB market. This means that exporters from the Republic of Ireland – an EU Member State – will continue to be able to export to Britain as they do now. Meanwhile, exporters from other EU countries will have to complete a range of additional Customs and Sanitary & Phytosanitary (SPS) documentation (e.g. full import declarations) from 1st January. The UK Border Operating Model will be updated accordingly shortly.
The Chief Brexit Negotiator, Lord Frost, claimed that the move was partly made as a “pragmatic act of good will” but that the continuation of such arrangements would be predicated by the quid-pro-quo that the EU shows in terms of allowing goods to circulate freely within the UK (including Northern Ireland, which although part of the UK, applies the EU Customs Code and other regulatory requirements).
We rote last month about the Farming Investment Fund (FIF). The larger grant element of this, the Farming Transformation Fund (FTF) opened at the time for grants for water management. The deadline for expressions of interest for this is the 12th January. Defra has now published the manual for the second theme of the FTF – Improving Farm Productivity. This can be found at – https://www.gov.uk/guidance/about-the-improving-farm-productivity-grant . The focus for the first round of productivity funding is robotic or autonomous equipment and systems to aid crop and livestock production and the installation of slurry acidification equipment. The scheme manual sets out what type of equipment may be eligible. The window to express an interest in this grant is due to open in mid-January. The manual has been published now to give potential applications time to consider their proposals.
The Government has published a review of how secure the nation’s food supply is – the UK Food Security Report (UKFSR). The Agriculture Act requires such a review at least every three years and this is the first comprehensive study of the topic since the UK Food Security Assessment in 2010.
As the report itself states, food security is ‘a complex and multi-faceted issue’. As such, the UKFSR does not come up with a simple answer such as ‘we are fine’ or ‘there’s a problem here’. It is arranged around five themes with broad conclusions drawn under each heading. Overall the report runs to over 300 pages and presents a wide range of statistics plus case studies and qualitative analysis.
The five themes, and a summary of their conclusions are;
The report does not set out a specific target for UK self-sufficiency in food. Self-sufficiency is often conflated with food security, but they are not the same thing. The report points out that having a diversity of supply sources is better than putting all your eggs in one basket (excuse the pun – Ed) of domestic production.
For more details on the UKFSR see – https://www.gov.uk/government/statistics/united-kingdom-food-security-report-2021
The 2020 year was not as bad for farm profitability as first estimated. Defra has released revised figures for Total Income from Farming (TIFF) for the year. These show that total aggregate profits for the farming sector in 2020 were £5.121bn (real terms, 2020 prices). This is just an 8% drop compared to the 2019 returns. 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.
When Defra made its ‘first estimate’ of 2020 profitability back in May, it had a year-on-year drop of 20% compared to 2019 (see https://abcbooks.co.uk/farm-profits-3/). The large revision is largely put down to two factors. Firstly, farm diversification was not as badly affected by Covid in 2020 as first estimated. Secondly, the volume of seeds, fertilisers and sprays used in the year was lower than first thought. This will be linked to the lower planted areas for harvest 2020 and more spring cropping.
Whilst this revision is quite large, it is not a huge surprise. The figures coming out of the Farm Business Survey (see last month’s article) had already suggested that the 2020 year was not as bad financially as many had feared. This is also borne out in individual farm accounts.
We had been forecasting that 2021 TIFF would be higher than 2020. This is still the case, although the uplift in last year’s figures means the ‘rebound’ will be less pronounced. Even so, it seems quite possible that aggregate UK farm profits for this year could be back at the £6bn level which has tended to be at the upper end of the range in recent years. With the large cost increases seen in recent months, it seems likely that 2022 will drop back again.
At this time of year Defra usually provide their initial forecast of TIFF for the year. However, the first official figures for 2021 profitability will not be published until January or February. For more information on the farm income figures see – https://www.gov.uk/government/statistics/total-income-from-farming-in-the-uk
At the same time as the TIFF data was released, updated figures on UK agricultural productivity were produced. The series is Total Factor Productivity (TFP), this measures how well farming converts physical inputs into outputs and gives an indication of the efficiency and competitiveness. TFP dropped 4.5% between 2019 and 2020. This is largely attributed to the effects of the weather in autumn 2019 through to spring 2020. Like the TIFF the figures have actually improved since the initial estimates (the drop had been 6.7% previously).
For more details see – https://www.gov.uk/government/statistics/total-factor-productivity-of-the-agricultural-industry
The Scottish Government has announced that rates of Income Tax will remain unchanged for the 2022/23 tax year. Whilst the thresholds for the 19% Starter and 20% Basic rates will be increased by CPI to £12,570 and £14,372 respectively, the thresholds for the Higher and Top rate bands will be frozen at £43,662 and £150,000. This effectively brings a bigger proportion of income into the higher tax bands. In terms of other taxes where the Scottish Government has autonomy to set levels, the Business Rate multiplier will rise marginally to 49.8p. There will be rate reliefs for the first three months of 2022/23 for retail, leisure and hospitality businesses. The Land and Buildings Transaction Tax (aka Stamp Duty) rates remain unaltered. Landfill tax rates increase to £98.60 per tonne or £3.15 per tonne for inert waste.
The cross-compliance guidance for the 2022 scheme year has been published. It can be found at https://www.gov.uk/guidance/guide-to-cross-compliance-in-england-2022. In summary, there have been no changes for the coming year so the rules remain the same as in the past couple of years. The Welsh Government has also published its cross-compliance rules for 2022 (see https://gov.wales/sites/default/files/publications/2021-12/cross-compliance-verifiable-standards-2022.pdf). Again, these effectively show no change from 2021.
The latest round of the Countryside Stewardship Facilitation Fund opened on 13th December. It will close to applications on 19th January with Agreements running from 1st June 2022 for three years. The funding is for a person or organisation (the facilitator) to help a group of farmers, foresters or land managers to work together to provide environmental benefit at landscape scale. This aims to achieve greater environmental improvements than individual holdings could make on their own. Members of the Group can already be in an agri-environment scheme and, from 2022, can enter ELM (if eligible). It is the Facilitators job to ;
The Facilitator will also have to have the relevant skills (or them buy-in) to support members to deliver the CS Priorities. Furthermore they will need to show what the Group is doing differently through working together rather than individually and the difference this is making to the delivery of CS Priorities. The scheme is competitive and only those offering the best value for money will be selected. Full details can be found via https://www.gov.uk/guidance/countryside-stewardship-facilitation-fund-2022-scheme-manual
Trade deals with Australia and New Zealand (NZ) have been announced with much fanfare over recent months. However, progress has stalled in converting these agreements-in-principle into legal texts. The target that this would be concluded by the end of the year now looks unlikely.
It is claimed that this is chiefly due to the UK rowing-back on the market access offered on beef and lamb so that the annual tariff-free quotas are based on carcase weight equivalent and not product weight (i.e. products shipped such as boneless beef or legs of lamb). A carcase weight equivalent basis would essentially mean that there would be less scope for Antipodean suppliers to export high-value beef and lamb cuts to the UK market and capture the shares of British producers.
Whilst the proposed EU-Mercosur trade agreement (which is being stalled by EU Member States) provided tariff-free quotas based on carcase weight equivalents, such arrangements are the exception in international Free-Trade Agreements (FTAs). As the UK has formally applied to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which Australia and NZ are members of, both countries are threatening to stall the UK’s application if their tariff-free market access for beef and lamb are calculated on this basis.
It remains to be seen how the impasse will be resolved, but one suspects that given the UK Government’s eagerness to join the CPTPP, it will concede on offering both countries access based on product weight. This would mean some increased competition for UK producers and exporters from the EU but, as previous articles have noted, both Australia and NZ are heavily focused on the Asia-Pacific markets presently, thus limiting their capability to supply the UK market as well.
