Category: Policy & Business

New EU Commission President

Ursula von der Leyen has been appointed as the new President of the EU Commission – one of the most powerful jobs in Europe.  She will replace the outgoing head, Claude Juncker, on 1st November.  Although that is (theoretically) the day after Brexit, as President-elect, Ms von der Leyen will have a big influence on any withdrawal negotiations during the autumn.  She has already stated that she would support a further extension of the UK’s withdrawal date “should more time be required for a good reason”.  Whilst the Commission is only the EU’s ‘Civil Service’, it has a far more powerful role than that title might suggest.  It proposes and drafts all EU legislation, enforces EU rules across Member States, and negotiates treaties (such as that with the UK).   Ms von der Leyen gained the role after a tortuous process that involved a delicate compromise between Member States and the European Parliament.  She is currently German Defence Minister and a close ally of Angela Merkel.

Welsh Policy Consultation

The Welsh farming industry has another chance to comment on post-Brexit support policy.  As we wrote last month, a further consultation has been launched on the design of the Sustainable Farming Scheme.  The consultation, ‘Sustainable Farming and Our Land’, will run until 30th October 2019.

Details of the scheme are obviously still being worked-out; as well as the consultation, a process of ‘co-design’ with farmers, foresters, advisors and academics is scheduled to start in the autumn.  However, some key features are likely to be included in whatever emerges.

A ‘Sustainable Farming Payment’ will effectively replace the BPS and Glastir.  This will be an annual payment to land managers that rewards ‘sustainable farming practices’.  This will be based on four principles;

  • it provides a meaningful and stable income stream.  There will be multi-year contracts with fixed payment rates which will help offset market volatility.  Payment rates will not be constrained by the ‘income foregone’ calculation, and there is an indication that the scheme will be set up so that the SFP can be a significant income stream into farm businesses.
  • it rewards outcomes in a fair way.  It is clear that the support will not simply be available ‘as of right’ like the BPS.  Farmers (and foresters) will be required to deliver ‘outcomes that are not rewarded by the market’.  As there is a market for food production, this will not be specifically supported under the scheme.  However, the provision of public goods will be rewarded.  Note the focus on ‘outcomes’ – it may not be enough to simply follow defined practices, it may be necessary to show that these are actually having the desired effect.
  • it pays for both new and existing sustainable practices.  Criticism of past agri-environment schemes was that they paid land managers for changing from harmful practices, but did not reward those already ‘doing the right thing’.  The SFP looks to change this.
  • it can be flexibly applied to every type of farm.  If the SFP is to be a realistic replacement to the BPS there is an acknowledgement that all farms must have a realistic chance of getting into the scheme and it not be restricted to certain geographies or farm types.

In addition to the annual payments under the SFP, there will also be significant business support.  This will focus on advice, capital investment and skills development.

In terms of advice, it is envisaged that entry to the scheme will be conditional on a Farm Sustainability Review that produces a Farm Sustainability Plan.  The farmer would put this together with an accredited advisor and it would set out what the farm could do to receive annual payments under the SFP and what business support would be useful.  Business support would come in three mains forms: business capacity and skills, capital investment to enhance sustainability, and knowledge transfer and specialist skills.

The capital investment strand could work in a similar way to the current Farm Business Grant.  Business capacity, skills and knowledge transfer will build on best practice from existing advisory services – for example the Farming Connect advisory service and Glastir contract managers.

The transition to the new support arrangements has not been set out due to the continued uncertainty over Brexit timing and future funding levels.  Likewise, detailed scheme eligibility and payment levels will not be decided on until later.

The consultation can be found at – https://gov.wales/revised-proposals-supporting-welsh-farmers-after-brexit

Sector Productivity

The productivity of English lowland beef and sheep farms dropped by 21% between 1990/91 and 2017/18.  Livestock farms in the LFA showed a 9% decline and mixed farms (which will include a high proportion of grazing livestock) recorded a 4% drop.  Other sectors fared better.  Cereals farms’ productivity increased by 25%, general cropping by 32%, and dairy by 27% over the 27 year period.

These figures come from new statistics released by Defra, which calculate Total Factor Productivity (TFP) for individual farm sectors.  TFP is a key measure of the performance of agriculture.  It represents how efficiently farm businesses turn inputs into outputs.  It looks at physical quantities of both, so swings in market prices should not influence the figures.  For many years Defra has produced a TFP figure for the whole industry (see -https://www.gov.uk/government/collections/productivity-of-the-agricultural-industry).  The same methodology has now been applied to individual sectors, based on Farm Business Survey data.  Defra highlight that this new analysis are experimental statistics and will be subject to further refinement.  Data for specialist pigs, specialist poultry and horticulture farms have not been presented due to concerns around small sample sizes.  The full statistics are available at https://www.gov.uk/government/statistics/total-factor-productivity-for-england-by-farm-type.  These provide more detail on what lies behind the headline figures.

It is obviously concerning that beef and sheep, one of the main sectors of English farming, has actually got worse over the last 27 years.  On closer examination of the figures, a lot of the decline in productivity occurred in the first few years of the period.  However, ‘flat-lining’ productivity for the last two decades is still pretty poor.  It is perhaps no coincidence that the beef and sheep sectors have been those that have, proportional to output, received the greatest level of subsidy in the recent past. 

Other sectors may feel slightly more pleased with their performance.  However, even the best, general cropping, at a 32% improvement, only works out at an annual increase of 1.2% – hardly stellar efficiency gains when compared with other parts of the economy.  Also, looking deeper, much of the apparent increase in productivity has come from a decline in labour use, rather than using inputs or land more efficiently.  The ‘productivity challenge’ is one of the biggest issues facing UK farming in its post-Brexit future.     

Defra Chief Scientist

Defra has appointed a new Chief Scientific Adviser (CSA), Professor Gideon Henderson.  Professor Henderson has been head of Earth Sciences at the University of Oxford and replaces Sir Ian Boyd, who is leaving Defra after seven years in the post.

 

Countryside Productivity Small Grant Scheme

The second application window for the Countryside Productivity Small Grants (CPSG) has finally opened.  Initially, we expected the second round in autumn 2018, then it was pushed back to ‘early 2019’, after which we were informed it would be mid-May following the BPS application window.  Defra realises the delayed application window is not ideal timing, being during harvest, and has therefore extended the window to eight weeks, closing at midday on 3rd September 2019.

The CPSG provides funding for farmers towards specific items of equipment to improve the productivity of their farm.  Claimants can choose from a list of items  (26 new ones have been added for Round 2) that have been chosen to improve either:

  • technical effiency
  • animal health and welfare
  • resource efficiency, or
  • nutrient management

Grants of 40% (up to 50% in Cornwall and the Isles of Scilly) of the standard cost of the item are available.  Applications must between £3,000 and £12,000.  Those who applied in Round 1 can apply in this Round as long as the value of both applications does not exceed the maximum of £12,000 and this grant also meets the minimum threshold of £3,000 i.e. the grant in Round 1 must have been £9,000 or below.

Once again, applications are made via a specific online portal.  Those submitting the application must have either ‘make legal changes’ or ‘full permissions’ for the applicant’s business on the Rural Payments service.

Once the closing date has passed, the RPA expects Grant Funding Agreements (GFAs) should be emailed out towards the end of September.  The grant funded equipment must be purchased and claims submitted within 150 days of the agreement.  During the last round, there were problems with supplies of some of the equipment.  Although equipment must not be ordered or purchased before the GFA is received, claimants are urged to order items quickly after an Agreement has been offered.  More information can be found on the Defra website at https://www.gov.uk/guidance/countryside-productivity-scheme#small-grants

Inheritance Tax Review

Gifts could become exempt from Inheritance Tax (IHT) after five years, rather than the current seven, if the recommendations of the Office of Tax Simplification (OTS) are accepted by Government.  This is one of the suggested changes in a report into the operation of the IHT which was published in July.  It is stated that the current seven years during which a lifetime gift may become subject to Inheritance Tax is too long as Executors can struggle to find records.  At the same time, it is also recommended that the tapering provision of potentially exempt transfers is abolished.  Other suggestions from the OTS include a simplification of the gift exemptions and better coordination of the rules between IHT and Capital Gains Tax.  For agriculture, the report states that HMRC should review their current approach around the eligibility of farmhouses for Agricultural Property Relief (APR) in sensitive cases, such as where a famer needs to leave the farmhouse for medical treatment or go into care.  Also, the HMRC should be clearer in their guidance as to when a valuation of a business or farm is required.  The background to the report outlines how niche IHT is – only 5% of all deaths in the UK result in any tax being paid.  Of the total value of estates in 2015/16, only 14% of the value fell to be taxed, with 64% being exempted by the nil rate band.  APR and BPR only exempted a further 1% and 2% of the value of estates respectively.  Although it is important to farming, the relative unimportance of APR in fiscal terms may provide some comfort to those who fear its abolition.  The full review can be found at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/814181/Final_Inheritance_Tax_2_report_-_web_copy.pdf

Food Review

Defra has finally published the Terms of Reference of an independent review into the food sector.  As we reported back in January, the review will be led by Defra non-executive director and food entrepreneur, Henry Dimbleby.   This is the third time that Defra has announced the same review, with the process starting back in the summer of 2018 and then re-announced at the Oxford Farming Conference.  Something now appears to be happening however, with ToR appearing and a ‘call-for-evidence’ to be launched in the summer.  The review will look at the entire food chain, from field to fork.  There will be a particular focus on how food can influence health and well-being.  The review will publish its findings in summer 2020.  The results of the review will then feed into an integrated National Food Strategy for England.  This will be an overarching strategy for government and aims to be produced six months after Mr Dimbleby’s report is delivered.  The terms of reference can be seen at – https://www.gov.uk/government/publications/developing-a-national-food-strategy-independent-review-2019

EU Agrees Mercosur and Vietnam Trade Deals

On 28th June, twenty years to the day that negotiations started, the EU and Mercosur reached a political agreement on a substantial free trade deal.  The EU estimates that, when fully implemented, the deal will reduce tariffs its exporters face by approximately €4 billion.  On a busy weekend for Cecilia Malmström, EU Trade Commissioner, the EU also signed the free trade agreement with Vietnam which had been largely negotiated in 2018.  Both deals are meant to send a message that, with the backdrop of the US-China trade dispute and the increased friction likely to result from Brexit, that the EU is open for business and keen to conclude trade deals with other global partners.   These announcements follow similar recent deals with Japan and Canada.  From an agri-food perspective, the Mercosur deal is attracting most attention as it could have significant implications for sectors such as beef, poultry and sugar.

EU-Mercosur Trade Deal

The details of the Mercosur deal are complex.  In summary, the South American trade-bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, would see tariffs removed on 92% of all its imports to the EU over a period of 10 years.  Focusing on the agri-food sector, tariffs will be cut on 82% of imports coming from Mercosur, with remaining agri-food imports subject to more partial liberalisation.  Notably, this includes beef where a quota of 99,000 tonnes will be permitted to be exported to the EU at preferential rates.  This will be implemented over a five-year period.  Additional volumes of imports will also be allowed of poultrymeat (180,000 tonnes) and pigmeat, (25,000 tonnes), with import restrictions on sugar and ethanol also eased.

From an EU export perspective, tariffs will be eliminated on 91% of its total exports and 95% of agri-food exports.  The dairy sector in particular will benefit from improved market access, with a quota of 30,000  tonnes for cheese, 10,000 tonnes for skim-milk powder and 5,000 tonnes for infant milk formula (Mercosur tariffs are currently at around 28% for dairy products).  These volumes will be phased-in over 10 years.   Whilst improved market access for dairy was welcomed in some quarters, market experts opined that demand for dairy products in the Mercosur market is quite lethargic and is hampered by high inflation, sluggish economic growth and a volatile political environment. 

Mercosur has also committed to protecting the Geographical Indications of 357 EU food and drink products.  The EU is also keen to point out that its food standards on Sanitary and Phytosanitary (SPS) matters would not be compromised in any way.  The EU-Mercosur deal also has a Sustainable Development chapter which commits both parties to upholding their Paris Climate Accord commitments

European beef, poultry, sugar and ethanol producers are expected to come under increased pressure from cheaper imports from South America as a result of this proposed deal.  The agreement has already attracted condemnation from the EU’s farming lobby with organisations such as Copa-Copega and the Irish Farmers’ Association (IFA) complaining that agriculture had been sold out to facilitate a wider deal.  Tellingly, the EU Commission also announced a €1 billion fund to help farmers to adjust to the market disturbances that could be potentially caused by the EU-Mercosur trade deal which indicates that there will be a significant impact on European farmers.

The feedback from the EU farming and food industry points to trouble ahead because, as our previous article on 26th June noted, the agreement thus far has only been at the political level and a number of hurdles remain.  Firstly, it will be translated into legal text before being put forward for ratification by EU Member States and the European Parliament.  Like the EU-Canada (CETA) agreement, there can still be several twists and turns in the process and the deal could be scuppered by a Member State or by a regional Parliament such as Wallonia.  Already, there is significant pressure being exerted on the Irish Government not to back the deal and it is anticipated that there will be similar calls elsewhere.

Any on-farm effects from this deal remain some way off, and in any case would be phased in over several years.  By the time this happens, the UK is likely to have left the European Union, so the impact of this particular deal might be negligible.  That said, the EU-Mercosur deal increases the competitive threat of South American products in European markets.  It is also likely to offer a template for any future trade deals between the UK and Mercosur which the UK is likely to prioritise post-Brexit. 

EU-Vietnam Trade Deal

This pact will eventually see duties removed on 99% of the EU’s imports from Vietnam.  Whilst the formal text has been approved by the European Commission, it still requires ratification by the European Council (representing the EU Member States) and by the European Parliament.  This is expected later this year.

From an agri-food export perspective, Vietnam with its population of around 95 million represents a fast-growing South East Asian market.  Its dairy industry is valued at approximately £5 billion and it currently imports 80% of this demand.  Average incomes have also been rising thereby driving demand for beef and pork products in particular, although the US and New Zealand account for the vast majority of these imports.

As with Mercosur, the UK’s pending exit from the EU means that it may not benefit significantly from this deal.  That said, much will depend on the length of the transition (implementation) period arising from the eventual Brexit deal and the UK’s access to third country market that have free-trade deals with the EU as part of this.  However, the South East Asian market is lucrative and the UK needs to prioritise the development of such markets as it resumes its independent trade policy. 

Mercosur Deal

The EU and the Mecosur group of South American Countries (Brazil, Argentina, Uruguay, and Paraguay) look close to concluding a trade deal.  Negotiations have been underway for two decades, but both sides state that ‘agreement has never been so close’.  Agriculture has, as always, been a stumbling block, especially imports to the EU of beef, sugar, biofuels and poultry.  However, most of the problems appear to have been resolved.  Any agreement would be one of the largest global free trade pacts, and a major boost for the rules-based international trading system at a time of increased protectionism and trade disputes (such as the US-China spat).  Any agreement at a political level will not translate quickly into effects on farm as, firstly, the deal will need to be ratified by EU institutions and, secondly, many of the provisions will be phased-in over a number of years.  With Brexit, the relevance of this to the UK may seem minimal.  However, it potentially makes Mercosur countries stronger competitors in the EU markets we will be looking to develop, and also puts Europe ahead of the UK in developing trade ties with this growing part of the world.  The UK is likely to prioritise replicating any deal the EU does with Mercosur.

Race for Next PM – The Final Two

At one stage, there were thirteen candidates seeking to become the next Prime Minister (and leader of the Conservative party) and, in some ways, the leadership race was akin to the Grand National with a varied range of runners and riders, some of whom had little chance of success.  In recent weeks, this has been whittled down to two candidates – Boris Johnson (previously mayor of London and Foreign Secretary) and Jeremy Hunt (Foreign Secretary).  This article examines the credentials of both, particularly from an agri-food perspective.

Boris Johnson

Whilst being the front-runner from the outset, the former mayor of London does not have much form when it comes to agri-food matters.  One of his few utterances related to complaints about the burden of EU regulations (e.g. on sheep disease) to protect consumers in advance of the referendum.  He also promised farmers that their subsidies would be preserved post-Brexit.

With regards to trade, at a January 2019 conference in Dublin, he was keen to emphasise that the UK still wants to do business with Ireland, noting to the audience that “we buy 78,000t of your cheese every year,” whilst also emphasising that he does not want to see a hard border in Ireland and that other solutions can be found.  Although Mr. Johnson’s preference is for the UK to leave the EU with a deal, he is of the view that it is possible to leave the EU on 31st October without a Deal, claiming that it would be possible to extend existing arrangements for as long as necessary to negotiate a free-trade agreement under GATT: Article XXIV (24).  Most trade policy experts dispute this claim, noting firstly that the application of this Article would require the EU’s agreement (highly unlikely in the event of a No Deal).  In addition, according to paragraph 5, sub-paragraph (c) of Article XXIV, it could only be applied if there was a “plan and schedule” for the formation of a free-trade area or customs union with the EU “within a reasonable length of time.”  By definition, none of this would be in place if there were to be No Deal on 31st October.  Thus leaving the UK Government in the same conundrum as that faced by the May administration.

Jeremy Hunt

Jeremy Hunt does not have much of a track-record with regards to agriculture either.  Before going into politics, Mr Hunt was an entrepreneur in technology marketing consultancy and in online publishing.  In Government, he has held roles as Health Secretary and Foreign Secretary.  Whilst not having much direct involvement in food and farming, he was the driving force behind a plan to halve childhood obesity by 2030 which he sees as a major cost burden to the NHS.  Although his website devotes some attention to the Agriculture Bill, post-Brexit environmental protections, and policy, as well as food safety and food labelling, it is very much a reiteration of the current Government line on these issues.

Whilst siding with Remain in the June 2016 referendum, Mr Hunt was quick to row-in behind the effort to leave the EU by securing a deal which would enable the UK to continue to trade closely with the EU whilst emphasising the Government’s commitments to guarantee workers’ rights, consumer protection and environmental protection.  He has mentioned that if there was no possibility of a Deal with the EU on 31st October that he would leave without a Deal if necessary.  However, he is also open to a short extension if a Deal is within sight.

Although Mr Hunt claims to have a good rapport with EU leaders such as Merkel and Macron, he did attract the ire of Donald Tusk in October 2018 for comparing the EU with the Soviet Union.  However, Mr Hunt’s track-record for controversy is much less than that of Mr Johnson and he is also seen as much less of a charismatic figure.  Based on the voting to date, it appears to be an uphill task for Mr Hunt to become the next Prime Minister.  His main hope might be for Boris Johnson to discredit himself with a major gaffe during the head-to-head contest over the next few weeks.  He may also need to create a “stop Boris” alliance within the party, potentially giving key roles to the likes of Michael Gove, Sajid Javid, Rory Stewart and Amber Rudd in a bid to appeal to all sections of the Conservative party to re-unite after the ructions of Brexit.  That said, it looks most likely that it will be Boris as PM after 22nd July. Whilst the Brexit journey has been eventful thus far, it looks set to go into overdrive in the Autumn.

For the farming sector, it is a case of wait-and-see what might happen.  Although Mr Gove is now out of the running to be PM, the possibility of a new Defra Secretary after a cabinet reshuffle has heightened.  A Hunt administration is likely to mean more of the same in terms of the direction of agricultural policy.  As for a Boris-led administration, who knows?  Whilst farming might be lower down his policy agenda, trade is likely to be centre-stage and this could have significant long-term implications for the competitiveness of UK agri-food.