Category: Policy & Business

Brexit Update

Although activity in Westminster and Brussels is usually subdued during the August holidays, this year it is more of a sense of calm before the storm as the Brexit process is expected to reach its climax in October. That said, there have been several noteworthy developments in recent weeks from an agri-food perspective.

Government’s No-Deal Brexit Preparations

Since coming to power last month, the Johnson Government has ramped up its preparations for No-Deal considerably.

On 21st August, the Chancellor announced that HMRC is automatically registering over 88,000 VAT-registered companies to be allocated an Economic Operator Registration and Identification (EORI) number.  This enables businesses to be identified by Customs authorities when conducting overseas trade. This is very much the first step required for businesses to continue trading with EU Member States post-Brexit and affected companies should start receiving notification letters in the coming days.  For businesses that trade with EU Member States which are not VAT-registered, and do not currently have an EORI number, they will still need to register if they wish to continue trading with the EU.  Further information on doing this can be found via; https://www.gov.uk/eori

For businesses trading in live animals and animal products, the Government has also published additional guidance on importing from, and exporting to, the EU (and countries such as Switzerland, Norway and Iceland which are also considered to be covered by EU trade). The following link lists the various certifications and approvals required when importing into Great Britain from the EU; https://www.gov.uk/guidance/moving-live-animals-or-animal-products-as-part-of-eu-trade

Earlier in the month, a leaked Government document on the Government’s No-Deal preparations reported by The Times (dubbed ‘Operation Yellowhammer’) suggested that the UK would face shortages of food and fuel in the short-term as there would be considerable delays at Ports as well as the re-imposition of a Hard Border in Ireland.  The Government subsequently claimed that the report was dated and that significant steps to prepare for a No-Deal Brexit have been taken since.

Whilst it is evident that the Government is ramping-up its preparations, it is also apparent that a No-Deal Brexit would cause significant upheaval in its immediate aftermath.  Although this could bring some longer-term opportunities, the concern amongst many in the industry is that the almost instantaneous change in the trading relationship with the EU would exert severe pressure on just-in-time supply chains at a time when storage capacity will be already limited in the lead-up to the busy Christmas period. 

Impact of a No-Deal Brexit on Farm Profitability

With the UK due to leave the EU on 31st October and the possibility of a No-Deal Brexit becoming more likely, The Andersons Centre (Andersons) recently conducted research on behalf of the BBC to assess its potential impact on the profitability of UK farming, 9-12 months after Brexit taking place.

To undertake this analysis, Total Income from Farming (or TIFF) is a useful measure to look at the farming industry as a whole.  It is an aggregate, so hides differences between sectors and individual businesses, but provides a simple measure of the profit of ‘UK Agriculture Plc’.  In technical terms, TIFF shows the aggregated return to all the farmers in UK agriculture and horticulture for their management, labour and their own capital in their businesses.  To allow for yearly variations in weather conditions, markets and exchange rates for example, a three-year average (2016 to 2018) was used as the basis for comparison.

Taking into account previous studies a top-level assessment of the impact of both a Brexit Deal and a No-Deal on the output of each farming sector was compiled in addition to an estimation of the effects of both Brexit scenarios on key costs which are incurred by UK farming.  This assessment considered the potential impact of tariffs (including the UK’s March 2019 announcement on its No-Deal Brexit tariff schedule), non-tariff barriers and tariff rate quotas.  Importantly, it was assumed that support levels to UK farming were kept constant as the UK Government has committed to farming receiving current levels of support until the end of this Parliament (scheduled to be 2022).

Under a Brexit Deal scenario, a small decline in profitability (3%) is projected; however, under a No-Deal, an 18% decline is forecast.

Impact of Brexit on UK Farm Profitability under a Deal and No-Deal Scenario

Sources: The Andersons Centre

Like all top-level industry averages, there is significant variation within the overall estimate.  For instance, where output is concerned, substantial declines are forecast for sheepmeat (-31%), whilst output for cereals, milk and beef production are also down.  Some increases are projected for horticulture and intensive livestock (pigs and poultry) provided there is sufficient labour available for undertaking operations.

With respect to costs, some decreases are forecast for inputs which would be affected by the introduction of lower UK import tariffs under a No-Deal scenario.  Examples here include animal feed, fertiliser and plant protection products.  However, other inputs such as veterinary costs are projected to rise as it is anticipated that there would be a significant increase in demand for veterinary staff to assist with border inspection operations.

An 18% decline in profitability would equate to a hit to UK farming generally of almost £850 million.  With many farms already struggling to break-even, the viability of many farming businesses will be in jeopardy. Unsurprisingly, grazing livestock farms (particularly sheep) would be the most exposed given the output declines mentioned above, but a No-Deal would also result in a significant downturn for dairy farming in Northern Ireland, given its reliance on having its milk processed in the Republic of Ireland.

For further information on how a No-Deal Brexit could affect farming and to address the trade-related risks arising, Andersons is running a webinar on Thursday, 12th September to provide further information on how businesses can prepare. Further information is available via:

https://attendee.gototraining.com/r/1384475755831393282

30 Days to Find Backstop Alternative

Despite its intransigence for much of the summer on renegotiating the Withdrawal Agreement (including the Backstop), the German Chancellor gave some hope to the Prime Minister when she suggested, on 21st August, to give the UK Government 30 days to come up with an alternative arrangement which is legally operable and would not result in infrastructure along the Irish border.  However, the EU was adamant that this did not mean that the entire Withdrawal Agreement could be negotiated which some in the UK have been seeking.

This additional flexibility from the EU is a welcome development as it is clear that the only way to resolve the outstanding issues is to at least have the opportunity to talk about them. The EU’s previous stance of seeing the Withdrawal Agreement as being completely closed and not up for any discussion was unhelpful and was ramping up the possibility of a No-Deal Brexit.  That said, the EU is not going to budge on the central issue of having a fall-back (Backstop) that would apply unless and until a legally operable alternative to the Backstop would be found.

To date, all of the Alternative Arrangements’ proposals put forward have fallen short of the EU’s requirements. This is because the proposals have either required some form of infrastructure on the Irish border, checks between NI and GB or would undermine the integrity of the EU Single Market in some way.  Time will tell whether new ideas will come forward in the next three weeks or so to resolve the impasse or whether some ‘fudged Backstop’ will emerge containing elements of the existing Backstop, the previously proposed ‘NI-only’ Backstop and some additional alternative arrangements.

Opposition Coalescing Around Avoiding a No-Deal

Meanwhile in Westminster, various opposition parties (and some Conservative rebels) have been working more closely together to avoid a No-Deal Brexit on 31st October.  Although such discussions previously centred on putting forward a No Confidence motion in the Prime Minister, it now appears that the main focus is on forcing the Government to extend ‘Brexit Day’ beyond 31st October if the alternative would be a No-Deal Brexit.  This approach is thought to have the best prospects of getting Conservative rebels onboard as their support would be crucial.  The Prime Minister has not ruled out the possibility of proroguing (suspending) Parliament so that it would be unable to vote on such a motion.

Overall, as Brexit reaches its climax something is going to have to give. The Government is intent on exiting on 31st October “come what may” and the opposition is uniting around avoiding a No-Deal Brexit, initially via another extension.  Whilst the EU has made some very small concessions, it will not U-turn on its red lines which include the Backstop.  Amongst all of this, the possibility of another UK General Election should not be ruled out. 

For the UK food and farming industry, whilst the uncertainty continues, every effort should be made to prepare for a No-Deal Brexit because according to most experts, it is more probable now than at any time throughout the Brexit saga thus far. 

Hedgrows and Boundaries Capital Grants

There appears to be delays in offering Hedgerows and Boundaries Capital Grants (HBCGs).  Agreements should have been offered in July to those who applied by 3rd May deadline, with contracts starting at the beginning of the following month.  Apparently they are awaiting ‘Defra clearance’, with no idea when this will be given.  This unfortunately continues a long-running saga of delays with Environmental and Countryside Stewardship Agreements.  Applications to the HBCG are all online and should in theory be fairly straightforward to process, but the hold-up seems to be with Defra sign-off, which seems rather strange.

Defra Brexit Leaflet

Defra has released a leaflet setting out its latest information on farming policy in England after Brexit.  With the slightly strange title of ‘Farming is changing, here’s what you need to know’ the leaflet includes much of the information we have already written about on phasing-out direct payments between 2021 and 2027 and introducing the new ELM scheme.  However it does give some further information and ‘firm-up’ a number of other ideas, although little detail is included.

With reference to existing payments and the way producers receive them the following points have been made;

Direct payments –  only the first year (2021) of deductions remain known, with the leaflet stating future deductions will be set taking into account detailed plans for future schemes and ‘wider decisions about Government spending’.  Defra has said it will keep farmers updated on decisions, but unless timely information is available, preparing budgets could become very difficult.  In addition, the ‘cash total funding’ guarantee is only until the end of this Parliament, which keeps being referred to as 2022, but could be sooner.

Delinking – this is the idea that direct payments will be made regardless of whether the claimant continues to farm or not.  Defra has confirmed in its leaflet that the earliest delinking would be available is 2021 and it will be consulting on the detail of these changes.  The consultation was originally meant to be this summer, but has been delayed until ‘later in the year’.

Lump sum – Defra has stated it is ‘looking into the option’ of offering farmers a one-off lump sum instead of annual payments and it plans to consult later in the year on how this could work best.  Similar to delinking, this option will be available from 2021 at the earliest.  However for both it was never really expected to be available any earlier.  With regards to the lump sum, the language used, ‘we’re looking into the option’ as opposed to ‘we plan’ for delinking, suggests lump sum payments are less likely. 

Rural Development Programme – the information leaflet reiterates all RDPE projects commencing before the end of 2020 will continue to be supported for the lifetime of the agreement.  However, what is new is mention of Defra working with the Ministry of Housing, Communities and Local Government to look into ways in which the UK Shared Prosperity Fund will support the rural economy after the UK leaves the EU.  Defra has confirmed Countryside Stewardship (CS) will continue to be available in the ‘first few years’ of the transition period.  Unfortunately there is no end date given and it is likely to be dependent on the progress of the new Environmental Land Management (ELM) scheme (see below) as Defra expects the two schemes to overlap for a ‘period of time’.  But those who are thinking about entering CS should not be put off for fear of being unfairly disadvantaged when the new ELM scheme is available as Defra has said it will ensure this will not happen.

As direct payments are phased out future funding and financial support will be available through;

Environmental Land Management (ELM) scheme – this will be the flagship scheme in the future.  Land managers will be awarded ELM agreements for providing environmental benefits.  The plan is to launch the new scheme from 2024, however, no further detail on scheme design is included.  The CS will not be available once the scheme is fully up and running.

Animal Welfare – Defra is looking into an animal welfare grants programme, which would provide one-off payments to support farmers to provide welfare enhancements beyond the regulatory baseline standards.  A further initiative being explored would see livestock producers being rewarded with on-going payments for signing up to and achieving animal welfare enhancements above the baseline.

Investment support – during the agricultural transition period (2021-2027), the plan is to offer support towards equipment, technology and infrastructure which improves farm productivity in an environmentally sustainable manner and provides other public goods.

Research and Development – support will be made available to enable farmers to work with researchers to find new ideas and technological solutions to problems that will really make a difference.  The innovation R&D package will build on the current £90m Transforming Food Production initiative. (see February 2018 article https://abcbooks.co.uk/innovation-funding/)

Whilst there isn’t a lot of ‘new’ information contained in it, the fact the leaflet has been released after the appointment of Theresa Villiers suggests Defra is still looking to implement Michael Gove’s plans.  Although as we have said many times, these proposals are still not laid down in legislation and could change, particularly if there were to be a new administration.

 

English Regional Statistics

Defra has published detailed statistical data farm profits in different parts of England (see https://www.gov.uk/government/statistics/agriculture-in-the-english-regions).  It has been doing this for some years for the main regions (South West, North East etc.), with a profit (Total Income from Farming, or TIFF) for each one.  But, in a new development, it has now broken the data down into greater detail, with a TIFF being provided for each County or Unitary Authority.  As an example, the profit from Lincolnshire agriculture in 2017 was £355m.

Agri-environmental Overpayments

It appears that around 1,000 Environmental and Countryside Stewardship scheme agreement holders have been paid too much.  These are some of the claimants who were given ‘Treasury-funded’ payments in July because they had outstanding claims dating from 2015-2018 (see June’s article https://abcbooks.co.uk/agri-environment-payments-2/).  The RPA should, by now, have written to all those affected requesting repayment.  The problem seems to be where the annual revenue claim has incorrectly included a payment for capital items as well.  It is probably inevitable there will be further over-payments identified once all the claims have been fully processed as the Treasury-funded payments were based on 100% of the estimated claim. 

Tree Planting

The water industry in England has announced plans to plant 11 million trees to support their goal of being carbon neutral by 2030.  The proposal involves planting trees on around 6,000 hectares of land.  In addition, there will be restoration work carried out on existing woodland, plus hedgerow and grassland improvement.  Some of the land is already owned by the nine major water and sewerage companies in England, but other land will be provided by Local Authorities, The National Trust, the Wildlife Trusts and the RSPB.  The Woodland Trust has also said it will help the companies identify appropriate sites and manage the planting programme once it has been developed.

Welsh BPS Payments

Similar to last year, the Welsh Government has announced a BPS loan scheme will be available to those who do not receive their 2019 Basic Payment on the first day of the payment window.  This year the payment window opens on 2nd December 2019 (1st is a Sunday) and closes on 30th June 2020.  Those in Wales who do not receive their Basic Payment on the first day will be eligible to receive payment of up to 90% of their claim.

Again, like last year, this will be an opt-in scheme.  It is expected applications will have to be made via Rural Payments Wales (RPW) Online.  Those who are due to receive a Basic Payment should keep an eye out for when the application window for the loan scheme opens as all are urged to apply because until payments are made claimants will not know if their payment will be made on the first day or not.  Last year loan payments were made from 10th December.  Wales already has a good record for making payments on the first day of the window, but this will ensure just about all claimants receive most of their Basic Payment within the first couple of weeks of the window opening.  The Welsh Government has said this will provide some certainty for those concerned about cash flow as the UK leaves the EU in the autumn.

National Food Strategy

Defra has launched a ‘call for evidence’ to feed into its National Food Strategy.  Readers may recall we wrote about this back in July.  The purpose of this element is to gather ‘inspiration’ to try and transform the food system.  Defra are particularly interested in ideas that;

  • help people make informed decisions about the food they eat
  • increase the access to and affordability of high-quality food
  • make food production more environmentally sustainable
  • help farming, fishing and food businesses thrive
  • promote the highest standards of animal health and welfare
  • put England at the forefront of innovation in the food sector.

The call for evidence is part of a wider independent review being conducted by Henry Dimbleby to assist the government to create its first National Food Strategy.  The call for evidence closes on 25th October 2019.  For further information and to submit evidence go to https://consult.defra.gov.uk/agri-food-chain-directorate/national-food-strategy-call-for-evidence/

Climate Change and Land – IPCC Report

On 8th August, the UN-affiliated Intergovernmental Panel on Climate Change (IPCC) released its report on how land usage contributes to, and is affected by, climate change. Its findings suggest that climate change is intensified by emissions from cattle and intensive farming practices, thus placing further scrutiny on meat and dairy products.

The study considers issues such as greenhouse gas fluxes related to land; interactions between climate change and desertification, land degradation and food security; land-related impacts and risks; response options that could help to adapt to climate change as well as response options that reduce land-related emissions or enhance carbon uptake by land systems.

Whilst the report stopped short of explicitly calling on people to become vegetarian or vegan, it suggests that by reducing meat and dairy consumption and switching to plant-based alternatives, people could be fed using less land, particularly in Western economies. It suggests that if farmland was diverted away from meat production and used for growing more forestry and biomass, it could help to create more carbon sinks to help to improve and regenerate soils. As with previous studies, emissions associated with methane were found to be most problematic as they are substantially more potent than CO2.  That said, it must be acknowledged that unlike carbon dioxide, methane dissipates in the atmosphere after approximately 12 years, whereas CO2 can remain in the atmosphere almost infinitely, if it is not sequestered or otherwise extracted. That should not be taken as an excuse for inaction, because undoubtedly emissions pose a significant challenge for the livestock industry and it needs to be addressed head on.

Food waste is also highlighted as a major issue with approximately one-third of food that is produced being lost or wasted, and from field to fork, it accounts for 8-10% of total global emissions. This is substantial given that the IPCC estimates that emissions from land use encompassing forestry and agriculture equates to 23% of human greenhouse gas emissions. In July, WRAP reported that in the UK, approximately 1.6 million tonnes of food from primary production is wasted annually, equating to just over 3% of food harvested. Further estimates from the WRAP report are provided in the table below and the results highlight that there is significant scope for improvement in managing waste at the farm-level.

Top-20 Food Waste Sectors from Primary Production by Volume (2017) (‘000 tonnes)

Source: WRAP (2019)

As the report was at a global level, it also covered numerous issues associated with combating soil erosion through greater use of sustainable management practices (e.g. more tree-planting, better management of peat resources so to help to sequester more carbon dioxide etc.). Issues around food security are also highlighted with respect to availability (yield and production), access (prices and ability to obtain food), utilisation (nutrition and cooking), and stability (disruptions to availability).

Overall, the report highlights the scale of the challenge that we face in addressing climate change. As with reports of this nature, global averages tend to hide a great deal of nuance. For instance, and particularly in large swathes of the British and Irish Isles, there are limited alternatives to livestock production whilst the proliferation of forestry can lead to problems with rural isolation if it is not managed properly. Indeed, the climate on these islands is one of the most conducive to grass-fed livestock production and improving its productivity (e.g. grass utilisation efficiency, better genetics) can also contribute to better environmental outcomes. Achieving net zero emissions requires a balanced approach, and undoubtedly everyone has a role to play. 

A summary version of the report is available via;

https://www.ipcc.ch/site/assets/uploads/2019/08/4.-SPM_Approved_Microsite_FINAL.pdf

Additional information can also be obtained on; https://www.ipcc.ch/2019/08/08/land-is-a-critical-resource_srccl/

Further information on the WRAP report cited above is available at;

http://www.wrap.org.uk/sites/files/wrap/Food_waste_in_primary_production_in_the_UK_0.pdf

Single Agri Environment Payments

All agri-environment payments in England are to move to a once-yearly basis.  Up to now there has been a 75% advance paid in the autumn of the scheme year, followed by a 25% top-up the following spring.  The RPA has now announced that a single payment will be made for the 2019 claim year onwards.  Like the BPS, this will be made at some point from the start of December through to June.  It is stated that this will improve overall payment performance by reducing the amount of processing work.  The change applies to both Countryside Stewardship and Environmental Stewardship (i.e. HLS) revenue claims.