Category: Policy & Business

Delinking and Lump Sum Payments

Defra’s response to the Delinking and Lump Sume Payment consultation has been delayed further.  Initially it was due to report on it in October, but said it hoped to report by the end of the year.  It has now announced ‘Publication of our report on the consultation has been delayed so we can fully consider the comments made by respondents. We received 654 responses. We expect to publish the report in early 2022’.  As said previously, if the Lump Sum exit scheme is to be availble in 2022, this gives very little time time for respective applicants and their advisors to interpret the rules.

Chief Brexit Negotiator Resigns

On 18th December, Lord Frost, the UK Government’s Chief Brexit Negotiator, and co-architect of both the Trade and Cooperation Agreement (TCA) with the EU and the Northern Ireland (NI) Protocol, resigned with immediate effect.  In his resignation letter, he cited issues with the Government’s direction of travel on Covid policy and higher taxation as key reasons for his departure. However, many suspect that frustrations with how negotiations with the EU are progressing on the NI Protocol were also influential.  In recent weeks, some progress had been reported on medicines and the UK’s stance on the European Court of Justice had softened but negotiations will continue into 2022 with agri-food, particularly Sanitary and Phytosanitary (SPS) regulation continuing to be a key stumbling block.

Whilst some see Lord Frost’s resignation as a blow to the Prime Minister, others believe that the possibility of a deal on the NI Protocol in early 2022 has increased.  Particularly with the Foreign Secretary, Liz Truss, now taking on the responsibility of overseeing negotiations with the EU.  Ms Truss is popular with Conservative party grassroots and is viewed as more of a pragmatist than Lord Frost.  Her experience as Defra Secretary (2014-2016) and International Trade Secretary (2019-2021) should also be helpful in addressing remaining SPS and customs issues.  She will be deputised by Chris Heaton-Harris MP who has become Minister of State for Europe who will support the Foreign Secretary on EU Exit and NI Protocol issues.

Interest Rates

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.

 

UK:Australia Trade Agreement Signed

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;

  • Tariffs:
    • UK Imports: there will be an immediate elimination of 99% of tariffs on goods imported from Australia to the UK upon entry into force (potentially sometime in 2022).  Pork, poultry and eggs are not included so the UK Global Tariff will continue to apply. However, restrictions will remain for other sensitive agricultural products as specified below.
    • UK Exports: almost all tariffs on UK goods will be eliminated upon entry into force. Tariffs on whisky, confectionary and biscuits will be phased out over 5 years. 
  • Tariff Rate Quotas (TRQs): the duty-free TRQs remain largely the same as previously outlined in the agreement-in-principle. These are summarised in the Table below.

  • More detail has been provided on what is included within each TRQ:
    • Beef (TRQ 1): the products (commodity codes) which are applicable include fresh/chilled beef (0201); frozen beef (0202); and a range of other chilled and frozen beef offal, preserved beef, beef-based meat mixtures and selected blood preparations.
    • Sheep meat (TRQ 2): products applicable include chilled lamb carcases/half-carcases (020410); chilled sheep carcases (020421); other sheep meat cuts with bone-in or boneless (020422; 020423); frozen sheep meat; edible flours/meals of sheep meat offal; and blood preparations.
    • Milk, Cream, Yoghurt and Whey (TRQ 3): applicable products are milk/cream whether concentrated or unconcentrated (0401; 0402); buttermilk and yoghurt (0403); and whey (0404 (excluding 0404.10.48)).
    • Butter (TRQ 4): all products under the 0405 HS code.
    • Cheese and Curd (TRQ 5): all products under the 0406 HS code.
    • Wheat (TRQ 6): this 80Kt TRQ applies to all types of common wheat but excludes seed (HS code 1001.99).  Wheat seed will have its £79 per tonne duty removed in 4 equal instalments and after Year 4, the duty will be removed. 
    • Barley (TRQ 7): this 7Kt TRQ applies to malting and other (feed) barley (HS code 1003.90), but excludes seed. Barley seed will also have its £77 per tonne duty removed in 4 equal instalment and will be duty free after Year 4.
    • Long-grained Rice (TRQ 8): a 1Kt TRQ applying to selected commodity codes.
    • Broken Rice (TRQ 9): an 11.5Kt TRQ applying to broken rice of all varieties (HS code 1006.40).
    • Sugar (TRQ 10): the TRQ is 80Kt (Year 1) rising to 220Kt (Year 8). It includes cane sugar, white sugar and other sugar (HS codes 1701.13; 1701.14; 1701.91; 1701.99). Beet sugar (1701.12) is excluded.
  • Sanitary and Phytosanitary (SPS) Measures: both parties emphasise their commitments to a science and risk-based approach to implementing SPS measures.  However, there is no mention of any changes to import standards.  Such changes, if they were to be introduced, would be set-out separately in future either by the UK or Australian Governments.  Therefore, this area will need to continue to be monitored closely. 
  • Rules of Origin: there is some more flexibility for UK exporters in terms of percentage of processed food ingredients that must be of UK origin, with a greater focus on the production process as opposed to the list of ingredients. This means that biscuits made from imported flour will qualify for tariff-free access to Australia under the FTA. It is also notable that whiskey from the Republic of Ireland used as inputs into Northern Irish whiskey will qualify for preferential access to the Australian market.  Effectively, NI whiskey will enjoy the same tariffs as Scotch whisky. 

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

UK Border Operating Model and Ireland

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).

FIF: Farm Productivity

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.

Food Security Report

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;

  • Global Food Availability: this looks at food security in terms of the UK being able to source the imports of food it requires (circa 50% of total UK food) from world markets.  The world supply of food has improved since 2010 and the report concludes there is still additional gains to be made through productivity increases.  However, there are long-term threats – especially from climate change but also biodiversity loss and over-exploitation of natural resources.  
  • UK Food Supply Sources: this looks at where the UK gets its food from – both home and abroad.  UK production of food is stable.  The fact that trading links have been maintained with our largest supplier, the EU, is seen as positive (although longer-term effects of Brexit are still unknown).  Again, the effect of changing climate on domestic production is seen as the biggest threat. 
  • Supply Chain Resilience: looks at food security in terms of the infrastructure underlying the supply chain.  The UKFSR states that the food supply chain is resilient but there are risks in its dependence on other inputs such as energy, transportation and key inputs such as chemicals and additives.  The report also finds that labour availability is a problem and there may be an issue with the high percentage of food that comes through a limited number of Channel ports.
  • Food Security at Household Level:  investigates whether households can reliably afford and access sufficient healthy and nutritious food.  The report finds that the vast majority of households have access to good food and that food and drink has become relatively more affordable over the past decade.  However, there are significant segments  of society where food availability is limited; both by affordability and access to good food.
  • Food Safety and Consumer Confidence:  covers food security in terms of the perceived and actual safety and authenticity of food in the UK.  Generally, there is a high level of confidence in the quality of food presented to consumers.  

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

Farm Incomes and Productivity

Big Uplift in 2020 Profits

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

Farm Productivity

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

Scottish Budget

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.