Category: Policy & Business

Brexit Update

Aside from details of the UK’s new Global Tariff regime published on 19th May (click here for article), there have been other notable recent developments in the Brexit negotiations.  These relate to the publication of the UK Government’s draft legal text for a UK-EU Comprehensive  Free-Trade Agreement (CFTA) and its proposals to implement the Northern Ireland (NI)-Ireland (IRL) Protocol.

Draft UK-EU Comprehensive Free Trade Agreement (CFTA)

This draft legal text was published on 19th May and forms a key part of the UK’s approach to the future relationship with the EU.  It elaborates on the objectives of the ‘Canada-style’ trading relationship which the Government set-out in February.  David Frost (UK’s Chief Negotiator) has insisted that the proposals approximate very closely what the EU has already agreed with Canada and Japan.

However, the EU is insisting that to get the kind of deal which the UK is seeking, it needs to agree to ‘level playing-field’ provisions designed to stop the UK from undercutting the EU’s rules on State Aid, tax, labour and environmental regulation.  According to trade experts, the UK’s ambitions in areas such as the mutual recognition of qualifications (e.g. lawyers) goes beyond what is contained in other FTAs, including Canada and Japan.  It is seen by Brussels as an attempt to ‘cherry-pick’ aspects of its current access to the Single Market, and the EU is unlikely to offer concessions on this without some commitments to its level playing-field requirements.

Other areas of friction relate to the EU’s demands for access to the UK’s fishing waters, Britain’s objections to any role for the European Court of Justice in overseeing any eventual deal and arrangements for the implementation of the NI-IRL Protocol (see below).

The draft legal text (292 pages) contains limited (six) references to agriculture and these primarily refer to the WTO Agreement on Agriculture. The legal text is accessible via; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/886010/DRAFT_UK-EU_Comprehensive_Free_Trade_Agreement.pdf

Whilst it is useful to get sight of the UK’s proposed legal text, this should be very much seen as a negotiating position.  The situation is likely to evolve significantly as discussions progress with the EU in the coming weeks.

NI-IRL Protocol

On 20th May, the UK Government set-out its proposed approach on implementing NI-IRL Protocol.  A core focus of this document is on protecting Northern Ireland’s place within the UK Customs Territory and to minimise the scope for friction on GB-NI trade. It plans to do this by;

  1.  Unfettered access on trade going from NI to GB: meaning that trade should continue as it does now, with no additional processes, paperwork or restrictions on such trade. The EU is unlikely to have problems with this as it is an internal UK matter. However, one area where there may be a potential issues is the EU foresees NI businesses having to implement its Customs Code and, as a result, exit summary declarations would be required on shipments leaving NI to the rest of the UK or other non-EU countries. 
  2.  Trade going from GB to NI: no tariffs will be levied on such trade if the goods remain within the UK Customs Territory (i.e. stays in NI).  Only goods ultimately entering Ireland or the Rest of the EU, or have a high risk of doing so would face tariffs.  Here, the EU takes a very different view and sees all goods entering into NI from GB as ‘at risk’ of moving South.  It believes that where goods have tariff differentials between the UK and the EU, there is a significant risk of smuggling.  It is clear that this will be one of the main areas of contention when it comes to discussions within the Joint Committee that will oversee the implementation of the Protocol.
  3.  No new customs infrastructure in Northern Ireland: whilst acknowledging that there would be some additional processes and documentation for goods, particularly agri-food, arriving into NI, these would be ‘de-dramatised’ as much as possible and no new physical customs infrastructure would be built.  That said, there would be some expansion of additional entry points for agri-food goods to provide for proportionate controls.  This will be another issue to watch, but the UK Government’s proposals appear to give it some wriggle-room to expand existing infrastructure to manage arrangements.  There are still many challenges here concerning agri-food as these will be the most arduous controls to manage, but the UK has made some progress in recruiting additional veterinarians for example. 
  4. Northern Ireland benefits from UK trade deals with third countries: sets out the ambition for NI businesses to benefit from lower tariffs associated with any such deals, just as GB businesses would. What NI businesses can eventually avail of will also be contingent on the specific arrangements that third countries who strike FTAs with the UK are comfortable with.

Another point to note is that the UK appears to be placing a greater emphasis on using the Joint Committee to oversee the implementation of the NI-IRL Protocol as a negotiating forum, whereas the EU sees it as a body to implement what has already been negotiated.  The issues above will no doubt be opened up for debate at the Joint Committee’s next meeting in early June.  Further detail on the UK’s approach is available via: https://www.gov.uk/government/publications/the-uks-approach-to-the-northern-ireland-protocol

Overall, there is a sense that momentum is building ahead of the next European Council (18-19th June) which will have a key role in any decision to extend the Transition Period beyond December 2020 (decision is due by 30th June), or to provide an alternative ‘fudge’ which extends the negotiating period until October possibly.  Whilst the UK is adamant that it will not extend the Transition beyond 31st December, influential voices are calling for an extended implementation period of 6-9 months beyond June 2020.  They claim that this would allow businesses to make the legal changes necessary to implement what has been agreed during the negotiating phase (taking place during the transition).  Whether all of this can be agreed and implemented within an additional 6-9 months remains a tall order, but any additional time would be welcomed by most businesses currently having to grapple with the Covid crisis.

EU Farm Strategies

The EU has published two strategies that are likely to have a  long-term effect on its farming industry.  The ‘Farm to Fork’ (F2F) and Biodiversity Strategies are core elements of the European Green Deal and set out the EU’s long-term goals and direction of travel for the agri-food sector for the next 10 years.  In the F2F Action Plan, the EU’s Executive has pledged to cut the overall use of chemical pesticides and the use of more hazardous pesticides by 50% by 2030.  It is also committed to reduce nutrient losses by 50%, ensuring there is no deterioration in soil fertility whilst reducing the use of fertilisers by at least 20% by the end of the decade.  Pledges also include the reduction of EU sales of anti-microbials for farmed animals and fish by 50% by 2030 and to halve the food waste per person at both retail and consumer level over the same timeline.  Furthermore, an Action Plan for Organic Farming is due to be published later this year, with the goal of reaching 25% of the EU’s agriculture land being farmed organically by 2030.  Acknowledging the current Covid-19 pandemic, the plan underlines ‘the importance of a robust and resilient food system that functions in all circumstances..’.  Through the EU Biodiversity Strategy for 2030 ‘Bringing nature back into our lives’ the Commission has pledged to transform at least 30% of Europe’s land and seas into effectively-managed protected areas.  One of the key commitments under the strategy is to introduce legally binding nature restoration targets in 2021, with the aim, by the end of the decade to have ‘significant areas of degraded and carbon-rich ecosystems restored’.

Oxford Farming Conference Cancelled

The organisers of the Oxford Farming Conference have decided to cancel the 2021 event, due to be held in early January next year.  Like many other gatherings, the OFC21 has fallen foul of the Covid-19 outbreak.  Although many months away, the organisers felt that they could not take the financial risk of booking venues with the threat that the conference could not go ahead.  There will be an online OFC instead on the 7th January 2021.

New UK Global Tariff Regime

The UK farming industry will continue to receive protection from cheaper global imports.  This is the result of the new tariff regime announced on the 19th May and represents somewhat of a U-turn from earlier Government policy.

The UK Government has announced its new Most-Favoured Nation (MFN) tariff regime, the UK Global Tariff (UKGT).  This sets the tariffs that have to be paid on imports entering the UK after the end of the Transition Period when it will replace the EU Common External Tariff (CET).  If there is no trade deal in place with the EU by the end of the Transition then these tariffs will also apply to imports from the EU as from  1st January 2021. 

The Government claims that the new tariff regime is tailored to the needs of the UK economy and that the UKGT will be simpler and easier to use in comparison with the EU CET.  Nearly 6,000 tariff lines have been streamlined or simplified, which is claims will reduce the administrative burden on business and ‘nuisance’ tariffs (under 2%) have been removed.

From an agri-food perspective, as the table below illustrates, most of the tariffs under the CET have been maintained at pretty much the same levels, but converted from Euro into Sterling.  In most cases, the currency conversion rate is €1 = £0.83, but there are some variations due to rounding and simplifications.  Effectively, the protection around the UK market will be kept at the same level as it was round the EU Single Market. 

Tariffs for products such as beef carcases continue to have both a percentage (12.0%)  and a fixed component (£147.00 per 100kg).  Whilst still complex on the face of it, this is a response to the needs of industry insofar that if a percentage-only tariff was applied, cheaper imports would have a lower tariff in monetary terms.  That said, meat tariffs are still largely expressed in terms of per 100kg, it would surely have been simpler from a business perspective to have expressed these in per tonne or per kg terms?

For cereals, the tariffs for wheat (changed from €95 per tonne to £79 per tonne) and barley (€93 to €77) remain largely the same and have only changed due to currency conversion.  Maize grain tariffs have been reduced to zero (from €10.40 per tonne).  This might provide extra competition to UK-produced feed grains, notably feed barley.   For wheat flour, the tariff has changed from €172 per tonne to £143.  The tariffs for maize, barley and oat flour have been reduced to zero but these are marginal products.  

Across fruit and vegetables, the main changes are simplifications and rounding.  For instance, the tariff for potatoes has reduced from 14.4% to 14.0%.  However, products such as oranges have seen somewhat more significant changes (e.g. tariff for fresh oranges reduced from 16% to 12%), thus making it cheaper for businesses to import such products which are not normally produced in the UK.

Another noteworthy point is that the UK plans to discontinue the EU’s Meursing table which creates thousands of tariff variations for products such as biscuits, pizzas, confectionary and spreads which complicates the calculation of tariffs for these products.

Commodity CodeDescriptionEU CET Duty RateUK GT Duty RateChange
02011000Fresh/chilled beef carcases 12.80% + 176.80 EUR / 100 kg12.00% + 147.00 GBP/100kgCurrency conversion
02031110Fresh/chilled pig carcases 53.60 EUR / 100 kg44.00 GBP/100kgCurrency conversion
02041000
Fresh/chilled lamb carcases 12.80% + 171.30 EUR / 100 kg12.00% + 143.00 GBP/100kgCurrency conversion
02071110
Fresh or chilled, plucked and gutted chickens26.20 EUR / 100 kg21.00 GBP/100kgCurrency conversion
04051011Butter189.60 EUR / 100 kg
158.00 GBP/100kg
Currency conversion
04069021
Cheddar cheese167.10 EUR / 100 kg
139.00 GBP/100kg
Currency conversion
07011000
Seed potatoes
4.5%4.0%Simplification
07101000
Potatoes14.4%14.0%Simplification
08051080
Fresh or dried oranges (excl. fresh sweet oranges)
16.00% (01 JAN-31 MAR, 16 OCT-31 DEC), 12.00% (01 APR-15 OCT)
12.0%Simplification
1001990050
Common wheat (low quality)95.00 EUR / tonne
79.00 GBP/1000kg
Currency conversion
10039000
Barley (excl. seed for sowing)
93.00 EUR / tonne
77.00 GBP/1000kg
Currency conversion
10059000
Maize10.40 EUR / tonne
0.0%Liberalisation
11010015
Wheat flour172.00 EUR / tonne
143.00 GBP/1000kg
Currency conversion
17011210
Raw beet sugar
33.90 EUR / 100 kg / std qual
28.00 GBP/100kg std qual
Currency conversion
17011310
Raw cane sugar 33.90 EUR / 100 kg / std qual
28.00 GBP/100kg std qual
Currency conversion
3102309000

Fertiliser (ammonium nitrate) in pellet form6.5%6.0%Simplification

Source: UK Government (Department for International Trade)

Further information is available via: https://www.gov.uk/guidance/uk-tariffs-from-1-january-2021

Overall, the UKGT schedule differs substantially from the substantial reductions previously proposed in March 2019.  On the face of it, this reduces the scope for the competitive pressure to be exerted on farmers, post-Transition.  Simultaneously, it will also serve to focus minds within the EU as the tariffs will be very prohibitive for EU farmers under a No Trade Deal scenario.  It shows that the UK Government is learning that announcing higher level tariffs can be used as an effective bargaining chip in trade negotiations, not just with the EU but other countries as well.

As with all matters pertaining to trade, the devil will be in the detail.  Its announcement did not cover Tariff Rate Quotas (TRQs) – these allow specified volumes of agricultural commodities to be imported either tariff-free or at much lower tariff levels.  This announcement is due to be made later in the year.  Any new TRQs that the UK introduces on a MFN basis will have the potential to cause significant competitive pressures.  For instance, if the UK Government decides to introduce new TRQs for beef similar to the 230,000 tonnes proposed in March 2019, substantial volumes would enter into the UK tariff-free.  As the chart below shows for beef, this would severely undermine the competitiveness of British farmers.  It is only when the UKGT (previously EU CET) is applied, that GB prices are competitive.  Meanwhile for Ireland, whilst its prices were slightly below GB when both countries were part of the EU, the application of the UKGT on its beef would render it uncompetitive in the UK market.

At least the UKGT schedule has given some clarity to businesses on the tariff levels to expect post-Transition, and potentially under a No-Trade Deal Brexit.  With the UK-EU trade negotiations still experiencing difficulties, some influential voices have recently called for a ‘Preparation, Ratification and Engagement Period’ (PREP) of 6-9 months from the end of June to permit the completion of trade negotiations by October and thereafter, to use this time to help business and regulatory authorities to prepare to implement the major legal changes which would ensue.  This call appears to be gaining traction amongst trade policy experts.  Such a period would certainly help, but it would remain a tall order to iron out all of the technical arrangements required to handle the future UK-EU relationship. 

Commons Passes Ag Bill

The Agriculture Bill passed its remaining stages in the House of Commons on 13th May. It made a small piece of legislative history as it was the first Bill to be voted on electronically (remotely). Apparently some MPs struggled with the technology as members of the Government (notably, the Chancellor Rishi Sunak) managed to vote against their own legislation.

In any event, there was a minor rebellion by some Conservative MPs as they attempted to get an amendment included in the legislation that would that would have guaranteed that imports of food would have to meet UK standards on animal welfare, the environment and food safety. It was tabled by Tiverton and Honiton MP Neil Parish, who is also chairman of the House of Commons Environment, Food and Rural Affairs Committee. The amendment was defeated by 328 votes to 277 and the Bill itself was finally passing by 360 votes to 211.

Ministers say the issue of protecting food standards in post-Brexit trade deals will be dealt with in the upcoming Trade Bill, and that the Agriculture Bill was not the correct place for it. However there is a fear that the Government doesn’t want anything written into legislation that will tie-its-hands when it comes to negotiating a deal and that cast-iron guarantees on standards may not be seen in the final Trade Bill.

The Agriculture Bill now passes to the House of Lords. The Lords is not yet set up for electronic voting (their Lordships may have even more problems with using the system . . . ). There will therefore be a delay before the Bill completes its legislative journey. The Lords may try to insert an amendment on food standards similar to that which failed in the Commons. It is still expected to receive Royal Assent in the summer.

UK Japan Trade Deal

Japan is one of the key target countries that the UK wants to do a post-Brexit trade deal with.  The Government has recently published its negotiating objectives for these talks, see – https://www.gov.uk/government/news/liz-truss-kick-starts-trade-negotiations-with-japan.  Japan is the third largest economy in the world (fourth if the EU is counted as one) and the 11th largest trading partner of the UK.  In terms of agri-food, any deal with Japan is likely to be far less important that those with the EU or US for example.  However, it is still worth watching for potential impacts.

Furlough Scheme Extended

The Chancellor, Rishi Sunak, announced on the 12th May that the Covid furlough scheme would be extended to the end of October.  The scheme, officially called the Coronavirus Job Retention Scheme, was originally due to finish at the end of June.  It will now continue on its present terms (80% of wages paid up to a maximum of £2,500 per month) until the end of July.  From the start of August the scheme will alter.  Details of the changes will be published by the end of the month, but the scheme will become more flexible – for example allowing employees to return to work on a part time basis.  It is also expected that employers will be expected to shoulder a larger proportion of the cost of the scheme.  At present, it is costing the Government around £10bn a month.

Farm Incomes Rise in 2019

TIFF Figures

The profit of UK farming recovered in 2019 after the drought-affected 2018 year.  The latest estimates for Total Income from Farming (TIFF) released by Defra show an increase of 6% in real terms, leaving profit for the industry at £5,278m for 2019.

TIFF is the total profit from all UK farming businesses for the calendar year.  It shows the return to all entrepreneurs for their management, labour and capital invested.  Readers with good memories may recall that, despite the latest figures being called the ‘first estimate’, a figure was published in December (see our article https://abcbooks.co.uk/farm-profits-up-for-2019/).  This was an initial forecast provided for the EU and at the time 2019 TIFF was forecast to rise 14% in real terms.  This always looked a little high to us – our estimate at the time was 6% which has turned out close to the mark.   

The main reason for the rise in profitability was an increase in arable output.  The overall sales of arable crops rose by 6%, with wheat leading the way with a 16% increase in output value.  This was largely a ‘bounce-back’ Overall livestock output was close to year-earlier levels, as were costs.  The chart below shows the historic TIFF figures, plus our forecast for the current 2020 year and 2021.

Whilst we are only partway through the 2020 year it seems highly likely that the lack of autumn plantings last year will affect output from harvest 2020.  There are also likely to be some Covid-19 effects such as reduced beef prices and dairy farm incomes affected for certain producers.  Whilst this will be offset by lower costs we forecast a decline in farm profitability for the year of 10%.  Towards the end of the year there may be market disruption as the Transition Period comes to an end – depending on whether a trade deal has been concluded with the EU or not.  Some of these trade effects may well linger into 2021 which is why there is a (tentative) forecast for another decline in TIFF. 

Further details on the aggregate agricultural accounts can be seen at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/883681/agricaccounts-tiffstatsnotice-07may20.pdf.  A further update to the statistics is due in November.

Productivity

Alongside the TIFF figures, Defra also published estimates of Total Factor Productivity (TFP) for 2019.  This measures how well inputs are converted into outputs and thus gives an indication of the efficiency and competitiveness of the farming industry.  It is one of the measures that Defra looks at closely, as it tries to improve the performance of UK agriculture. 

The figures for 2019 show a significant uptick with TFP increasing by 4% between 2018 and 2019.  This was largely caused by an increase in the volume of outputs (up by 3.8%) with a small decline in the amount of inputs used (-0.2%).

Although this is encouraging, any one year’s figures need to be viewed with some caution – the series tends to fluctuate on an annual basis, and it is the trend over a longer period that is more important.  UK agriculture shows an improvement in productivity, but the rate of increase is slow.  Since the figures began in 1973 the annual average increase is around 1%.  From 2000 to 2019 is has been at a lower level of 0.7% per year.  Getting TFP, and other productivity measures, moving upwards more strongly is one of the key policy goals of Government over the next few years.  For more details see –  https://www.gov.uk/government/statistics/total-factor-productivity-of-the-agricultural-industry

Covid Business Support

The Government has added to the suite of schemes available to help businesses cope with the effects of the Coronavirus outbreak.

Following criticism of the Coronavirus Business Interruption Loan Scheme (CBILS) a new ‘Bounce Back Loan Scheme‘ (BBLS) opened on the 4th May.  Unlike CBILS, the Government will guarantee 100% of the loan under BBLS, as opposed to 80%.  This means that the banks providing the loans have a much lower requirement to undertake due-diligence on the application.  CBILS had been criticised due to the time it was taking to process applications.  Under BBLS it is envisaged that funds should be in a business’s bank account ‘within a day or two’ of application.

Loans under BBLS can be between £2,000 and £50,000, with the Government paying all the interest for the first 12 months.  The amount of the loan must be no more than a quarter of annual turnover and the business must not have been an ‘undertaking in difficulty’ on the 31st December 2019.  Firms that have already taken a loan under CBILS are not eligible.

There has also been some streamlining of the original CBILS scheme.  This has a higher lending threshold of £5m.  Firms will now be assessed on their viability before the Covid-19 outbreak and there will be no requirement for forward-looking business plans and budgets.

Of interest to the many self-employed people working in agriculture and the allied trades will be the progress of the Self-Employed Income Support Scheme (SEISS).  This is opening earlier than expected.  The online portal through which claims can be made will be available from 13th May.  It is expected payments will commence from the 25th May (ahead of the end-June deadline originally outlined).  HMRC are contacting self-employed people through e-mail, texts and post outlining what they need to do.  Applications will open in tranches based on the Unique Taxpayer Reference (UTR) number.  There is an online eligibility checker at – https://www.tax.service.gov.uk/self-employment-support/enter-unique-taxpayer-reference

Welsh Future Farm Support

The Welsh Government has published the responses to its consultation on future farm support undertaken last year.  There were over 3,000 submissions to the ‘Sustainable Farming and our Land’ consultation.  The summary of these can be found at – https://gov.wales/written-statement-sustainable-farming-and-our-land-summary-responses.  The Government concludes that there is ‘broad support for the Sustainable Land Management (SLM) framework’.  As previously written, the administration is taking forward the design of its scheme through a ‘co-design’ process with the farming sector.