Tag: Brexit

Brexit Deal Reached

On 17th October, UK and EU negotiators agreed a new Withdrawal Agreement for the UK’s exit from the EU.  Many thought that such a revised agreement was not possible in the time available and, on first appearances, it is an impressive feat; however, the Deal reached is quite similar to the Northern Ireland-only Backstop arrangement proposed by the EU back in March 2018.  Below are some key points from an agri-food perspective;

  • Financial settlement (‘Divorce Bill’ (£39bn)) and the protection of citizens’ rights provisions: these are unchanged from the previous ‘Theresa May’ Withdrawal Agreement.
  • Ireland/Northern Ireland protocol: which has been subject to intense debate has been changed so that a customs and regulatory border between Northern Ireland and Great Britain has been created.
    •  Customs: this has resulted in the UK-wide backstop put forward by Theresa May being ditched, meaning that Great Britain is outside the Single Market and Customs Union but Northern Ireland is not.  That said, Northern Ireland remains part of the UK Customs Territory.  It will still be able to avail of lower tariffs that the UK introduces post-Brexit, although businesses will initially have to pay the higher EU tariff (if applicable) on imports into Northern Ireland and the difference (EU tariff – UK tariff) could be reclaimed at a later stage.. This is provided that the goods in question remain in NI and State Aid limits are not broken (see point below).  Personal goods (e.g. food carried in personal luggage at airports) would be exempt from duties being imposed between GB and NI.
    • Single Market Regulations: as reported in our 3rd October article (click here), a regulatory border would be imposed down the Irish Sea (between GB and NI) for agricultural and industrial goods.  This means that NI would continued to follow the EU rules in areas such as sanitary and phytosanitary (SPS) regulations whilst creating scope for GB to diverge in future. 
  • Northern Ireland consent mechanism: has been introduced which would give the Stormont Assembly the opportunity to approve the arrangements four years after they come into force (currently envisaged at the end of the transition period in December 2020) and each four years thereafter.  The vote would be based on a simple majority, but if future votes (say in a further four years after) had the support of both Nationalist and Unionist communities, then NI would follow EU rules for a further 8 years.  If consent was not forthcoming, a two-year ‘cooling-off’ period would be initiated to try and find a solution.  If the Assembly was not functioning, current arrangements would roll-over.  This arrangement is still likely to create some problems for long-term business planning (e.g. it may be difficult to do a five-year plan), but as it is based on a simple majority, rather than a veto by one community, it arguably is more stable than the previous UK Government proposals.
  • Labelling: Article 7 of the legal text mentions that a “UK (NI)” label would be used for Northern Irish goods placed on the European Union market where there is a legal requirement to do so.  This will be important from an agri-food perspective for products such as meat and dairy.
  • State Aid: the UK authorities can provide support to agricultural production and trade in agricultural products in Northern Ireland up to a “determined maximum overall level of support” as long as such support is compliant with the WTO Agreement on Agriculture.  This maximum support level will be determined by the Joint Committee overseeing the Ireland/Northern Ireland Protocol and would consider future UK agricultural policy as well as support expenditure to NI agriculture under the CAP during the 2014-2020 period. In practice, this provision seeks to ensure a level playing-field between Northern Ireland agriculture and that in the Irish Republic. However, it should also be worth noting that any tariff differences on agricultural products between the UK and the EU which can be reclaimed by Northern Ireland businesses might also be considered when setting what funding would be available, as this would be a form of Government support.  This has not been confirmed at this early stage but needs to be borne in mind. 
  • Level Playing Field (LPF): this was subject to much concern on the EU side over the fear that in the future, a UK Government which is free from the Brussels’ regulatory orbit would undermine EU regulations to gain a competitive advantage.  The LPF provisions in the previous May Deal (e.g. labour market rules) have been removed to a significant degree.  That said, the Political Declaration still contains a note that if the UK wants to secure a comprehensive Free-Trade Agreement with the EU in the future, it will still need to adhere to strong regulatory standards.

What Happens Next?

In some ways, getting a political-level deal with the EU was the easy bit.  Boris Johnson now has to convince Parliament to approve the Deal.  This is looking like a very tall order, especially as the DUP will not be supporting the New Withdrawal Agreement as they see it as a betrayal.  In the (perhaps unlikely) event that Parliament approves the Deal, the UK would depart the EU on 31st October and enter into a Transition Period where, aside from the UK being officially outside of the EU, very little changes.  The Transition is still due to end in December 2020, although there appears to be scope in the New Withdrawal Agreement for this to be extended.  Such an extension might be needed, as negotiating a FTA with the EU (and getting it ratified) in little more than a year is a very tall order.

If Parliamentary approval is not granted on the 19th October, the Benn Act provisions kick-in and the Government would be obliged to request an extension of EU membership (until 31st January).  This would make a General Election inevitable (it’s probably inevitable in any case) and the PM would play very strongly on the fact that he secured a Deal but the Parliament would not back him.  Given the UK’s first-past-the-post system and the general public’s dismay and fatigue with Brexit, the momentum appears to be with the PM, whether he gets approval for the Deal tomorrow or requires a General Election to do so.  At least, there finally appears to be some clarity with the Brexit process and the 19th October will be pivotal.  Industry needs to get back to focusing on the day-to-day issues and the major challenges facing the economy.  We will be providing further analysis in the near future as the situation becomes clearer.

Brexit – The Tumult Continues

This past month has been one of, if not the most, tumultuous of the entire Brexit process.  It started off on a fairly promising note with EU leaders (most notably the German Chancellor) giving the UK Government 30 days to put forward its proposals on an alternative to the Backstop.  However, the mood has become more downbeat since then with the publication of the Government’s plans for a No-Deal Brexit (Operation Yellowhammer – see previous article), the prorogation of Parliament which the UK Supreme Court has judged to be unlawful, and the disclosure of the UK Government’s alternative Backstop arrangements (delivered by a ‘non-paper’) which the EU deemed to have failed each of Brussels’ three key criteria.  All the while, the Government’s preparations for a No-Deal continue apace with some notable updates of relevance to agri-food trade.

Prorogation of Parliament ‘Unlawful’

This was the unanimous verdict of eleven Supreme Court judges delivered on 24th September.  The prorogation has been rendered void and Parliament resumed on 25th September.  This is another major setback for the Prime Minister as the Government no longer has a majority in the House of Commons (HoC) as it removed the whip from 21 MPs for voting against the Government.  The PM also lost his bid to have a mid-October election and there appears to be very little appetite for MPs to agree on any long-term course of action on Brexit.   A summary of the current state-of-play is;

  1. Brexit could still be achieved by getting a deal with the EU ratified by Parliament: despite the embarrassment arising from the Supreme Court ruling, Brexit is still achievable if the UK Government can achieve a deal with the EU at the EU Council meeting on 17-18th October, and thereafter, getting a majority of MPs to back that deal.
  2. If a deal with the EU is not achievable, Article 50 would be extended again:  the ‘Benn Act’ (officially titled the European Union (Withdrawal) (No. 2) Act 2019) passed by MPs a few weeks back would result in another mandatory extension of Article 50, if a Brexit Deal cannot be reached during the EU Council.  Theoretically, the PM could choose to ignore the Benn Act.  Such a course of action would likely result in another Supreme Court case, with an unfavourable ruling again likely.  In such a scenario, it is possible that the Supreme Court could instruct another official to sign an Article 50 extension letter if the PM refused to do so.
  3. Agriculture Bill reinstated: the Agriculture Bill is currently at the Report stage ahead of a third reading at the House of Commons.  With the prorogation of Parliament the Bill had ‘fallen’  – i.e. as it had not been passed by the end of the Parliament, it would have to be re-presented from scratch in the next Parliament.  But, now the prorogation has been ruled illegal, the Bill has risen from the dead,  As Brexit is likely to take up the vast proportion of Parliamentary time for the foreseeable future, it is likely that further progress on this Bill is still several weeks, if not months, away.

In this volatile environment, a General Election is becoming more likely, potentially in November if another Article 50 extension takes effect.  However, there is also increasing talk of a Government of National Unity, led by one of the parental figures in the HoC (Harriet Harman or Ken Clarke).  This move would require approval from Labour in a no confidence motion.  However, its leadership would prefer that an alternative Government be led by Jeremy Corbyn.  He would then seek to negotiate an alternative Brexit Deal with the EU and put that before the British people in a confirmatory referendum (with Remain the other option).  So all of this effectively means that after three years, the three broad Brexit options (Deal, No-Deal, No Brexit) all remain in play, but it does make a No-Deal at the end of October less likely.  Little wonder then that many think the Brexit process is going round in circles.

UK’s Alternative Backstop Proposals Not Legally Operable

Having been set the 30-day challenge by Angela Merkel a few weeks back to come up with a viable alternative to the Backstop, the UK’s proposals eventually emerged via a ‘non-paper’ (an unofficial document reflecting the ideas that the UK has put forward rather than concrete proposals representing a definitive UK Government view).  These were deemed by the EU to fall short on all of its three key tests on viability and were not legally operable. These key tests (objectives of the Backstop) are;

  1. Having no hard border on the island of Ireland
  2. Protecting the all-island economy
  3. Preserving North-South cooperation

The UK proposed an all-island Sanitary and Phytosanitary (SPS) zone for agri-food goods; thus expanding the regulatory frontier that already exists for live animals between Northern Ireland and Britain.  It would have only been applicable to some areas (e.g. animal health and food safety checks) and not others (e.g. labelling rules on ingredients, allergens and additives etc.).  Furthermore, industrial goods and customs procedures relating to Northern Ireland would remain within UK rules, and not the EU regulatory regime as proposed by the original (NI-only) Backstop.  From an EU perspective, this would potentially mean a gaping hole in the integrity of the Single Market as false declarations could potentially be made on what a consignment of goods contains, thus meaning that ineligible products would be smuggled into the EU market.  In such a context, the imposition of a hard-border between Northern Ireland and Ireland would eventually become necessary, as alluded to by EU Commission President Jean-Claude Juncker recently.

The UK proposals also referred once again to (frequently untried and therefore untrusted) technological solutions and trusted trader schemes which have already been rejected several times by the EU.  As we’ve argued previously, that is not to say that technology does not have a long-term role to play – it does – but given current capabilities, it cannot replace human intervention in undertaking physical checks to verify the eligibility of meat products and the like.  In the meantime, some form of insurance mechanism (Backstop) is required. 

In the coming weeks, it is likely that there will be an increased focus on finding a NI-only (or unique set of arrangements for NI’s circumstances) route to overcome the impasse.  As a minimum, this would have to encompass harmonisation with EU regulations on the entirety of agri-food-related regulations within Northern Ireland (and applicable to goods entering NI) whilst ensuring that the province’s constitutional status within the UK is not affected in any way.  Recently, the prospect of giving the Stormont Executive (currently suspended) a role in the acceptance of such regulations was mooted; however, the EU does not want NI to have a veto on the imposition of rules across the Single Market.  It is prepared to countenance a consultative role, similar to that offered to Norway and Switzerland in some areas. Perhaps one way to address this would be to give the NI Executive some voting rights in a qualified majority voting context, but no veto?  However, the extent to which that would be legally operable is questionable. 

More Brexit Preparation Notices Published

There has been a continued ramping-up of efforts by the Government to help businesses to prepare for post-Brexit trade with the EU.  Some of the key notices published recently are ;

Undoubtedly, the Government’s preparations for Brexit are accelerating but significant gaps remain, particularly when it comes to issues associated with Northern Ireland.  Furthermore, publishing guidance is one thing, ensuring that businesses and relevant competent authorities are operationally ready for the changes imposed is another matter entirely.  

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. 

Impact of Trade Barriers on UK Beef and Sheepmeat

Beef and sheepmeat trade with the EU could plummet by over 90% under a ‘No Deal’ Brexit.  This is one of the headline findings of a study recently published by the AHDB in collaboration with QMS and HCC.  The report, complied by The Andersons Centre, looks at the impact of trade barriers on the UK beef and sheepmeat sector post-Brexit.  It examined two scenarios; a Brexit Deal and a No Deal Brexit.  Some of the main points include;

  • Trade impact under a Brexit Deal scenario is relatively small:  total exports would decline by about 1% in volume terms (imports 0.8% lower), driven by EU27 declines.  Sheepmeat exports to EU27 are forecast to decline by 1.5% whilst corresponding imports would be 3% lower. These declines are chiefly due to Non-Tariffs Measures (NTMs) – i.e. the increased trade ‘friction once the UK was not part of the Single Market.  There would be minimal changes to non-EU trade.
  • Significant upheaval under No Deal: trade with the EU27 would plummet (by 92.5%) due to the imposition of tariffs, TRQs and higher impact of NTMs.  Sheepmeat trade with the EU would be almost completely wiped out.  Substantial declines in trade with the EU27 would also ensue for beef – exports down by 87%, imports declining by 92%.  Somewhat better market access for beef compared to sheep, due to TRQs, would permit some UK-EU trade to continue.  The introduction of a new 230Kt TRQ for UK beef imports would cause non-EU imports to soar by over 1,300%.  This would lower prices and drive-up UK consumption by approximately 7%.  Sheepmeat imports from non-EU countries are not anticipated to change whilst consumption is projected to rise by 14% due to declining prices.
  • Price impacts: there would be small declines under a Brexit Deal scenario (-1 to -3% respectively).  Under No Deal severe price declines would be seen.  Sheepmeat is particularly exposed (projected 24% price fall under No Deal).  Downward price pressure for beef (-4%) under No Deal arises due to competition from lower priced world-market imports.  This would be exacerbated if significant volumes of Irish beef enter the UK barrier-free via NI.
  • Value of carcase meat output: under a Brexit Deal, output would decline by an estimated 1.7% whilst under a No Deal the decline would increase by nearly ten-fold (-11.7%) with sheepmeat output nearly 31% lower which would be devastating for incomes in the sector.  Growth in exports to non-EU markets under No Deal would be insufficient to compensate for the loss of access to the EU27.

Projected Impact of Trade Barriers on Domestically-Produced Beef and Sheepmeat (Farm-Gate Level)

Sources: Defra (2019) and The Andersons Centre (2019) *Baseline Figures derived from Defra data.

  • Similar Impacts at Farm Level:  Andersons’ Meadow Farm model projects a 27% decline in profitability (£68 per Ha versus the current £93 per Ha) under a Brexit Deal, but the farm would still be profitable provided it can maintain its current support levels.  Even with support unchanged, Meadow Farm starts to generate unsustainable losses under No Deal with a projected deficit of £45 per Ha, equating to a £7,000 loss.
  • Domestic Market Opportunities: could arise for domestic producers if trade barriers reduce the competitiveness of imports.  However, the proposed access granted under additional TRQs in the beef sector would diminish this.  There are also fears that future changes to standards might make imports more competitive, thus limiting domestic market opportunities even further.
  • Frictionless trade with the EU27 as a third country is not currently possible: and looks set to remain so for at least a decade as the required technology has not yet been developed, let alone tested.  Long-term, technology can contribute to reducing this via e-certification systems, but friction cannot be reduced completely.  Post-Brexit increases in trade friction are inevitable.
  • Most significant non-tariff measures relate to value deterioration: value deterioration (especially fresh meat) arising from border-related delays associated with physical checks and sampling (associated with sanitary and phytosanitary (SPS) regulations) is of most concern to industry and is the biggest contributor to non-tariff costs generally.  Its impact on frozen products is much lower but still a factor in terms of potential penalties imposed on delayed consignments.
  • Uncertainty about future border arrangements:  under No Deal centres particularly on trade on the island of Ireland which the UK Government has claimed would remain frictionless.  If there are also no checks on NI-GB trade, whilst any exports routed from Dublin to Holyhead would be subject to tariffs and regulatory checks, the potential for re-routing meat from the Republic of Ireland via NI and onwards to GB without any checks, could result in substantial volumes of Irish beef being placed on the UK market (beyond the 230Kt TRQ) by the ‘backdoor’.  If significant volumes enter the UK in this fashion, substantial price declines for UK beef farmers would ensue.
  • Disproportionate impact on Small and Medium-Sized Enterprises (SMEs): arising from higher operating costs, fewer loads dispatched and a lower propensity to avail of special authorisations such as AEO status (which confers a lower risk on operators from a regulatory authority perspective).
  • Inflationary pressures: particularly for farm-level imported inputs from the EU27 (e.g. fertiliser, medicines etc.) but also elsewhere.  These costs are unlikely to be absorbed by the supply trade and would be passed on to consumers and/or to primary producers (i.e. farmers).  Any meat price rises are likely to cause consumers to increase their propensity to substitute with cheaper sources of protein, thereby making it more likely that beef and sheep farmers would beat the brunt of price pressures.

The study concluded that a Brexit Deal based on a comprehensive FTA and close customs and regulatory arrangements with the EU would be far preferable to a No Deal Brexit, which could have a devastating impact, especially for sheepmeat.  Whilst developing overseas markets will be crucial to the long-term success of British beef and sheepmeat, close attention must be paid to protecting existing markets, specifically the domestic UK market and the EU27 export market.  The study also found that even if the UK had never entered the EU (or EEC) in the first place, it is highly likely that markets such as France would still be vital to the British sheepmeat industry due to proximity.  To minimise any upheaval post-Brexit, the report states that having a comprehensive mutual recognition agreement between the UK and the EU is crucial.

The report’s findings were similar to several previous studies; however, this study goes into significantly more detail on how non-tariff measures could affect the sector.  It also provides useful insights on the implications of a No Deal Brexit for carcase balance in the sheepmeat sector where it estimates that up to 22% of the annual UK lamb kill (3.1 million head) could be affected.  This would be a major challenge to a sector where approximately one-third of the lamb crop is exported each year.  If it wasn’t already clear, this report underscores the importance of a good Brexit Deal for the grazing livestock sector.  The report is available via: https://ahdb.org.uk/knowledge-library/red-meat-route-to-market-project-report 

UK Grain Harvest and Marketing Commentary

UK Combinable Crop Harvest – What Should We Expect?

The harvest is in its early stages; it started a little earlier than usual and for some, even earlier than last year.  Considerable activity until Thursday last week was seen with barley, oilseed rape and even some wheat reaching the barns, but the storms over the weekend have halted most harvesting. We expect a picture of a stuck combine in Friday’s Farmers Weekly as usual!

For much of the UK though, the crops are in a good condition, especially the cereal combinable crops and early indications suggest good yields (albeit early). The jury is still out for oilseed rape, although, whilst we have heard a lot about crop write offs and poor condition crops, there are still plenty of farmers sitting quietly on what looks like a full field of seeds. It is difficult to tell before the combine has been through. The storm over the weekend has flattened some crops at a very late stage which might cause some harvesting problems.

In much of Europe, particularly, France and Germany, the two main grain producing countries, the recent spells of very high temperatures have apparently taken a toll on the ripening crops. However, the crop tonnages forecast remain comfortably above the very poor yields harvested last year.

OSR

Oilseed rape harvest started before the storm.  Following the last couple of very dry days of last week, a few farmers had been harvesting very early in the day or trying to wet the seeds to a level that would be accepted by merchants. To recap, the standard FOSFA contract for oilseed rape is for 9% moisture.  Oilseed rape is not accepted at moisture levels above 10% (or you would incur drying charges).  You gain 1% in price for every 1% the moisture decreases to 6%.  Below that point, it becomes difficult for a crusher to extract oils so is rejected. If you are testing the seed and the moisture levels are heading down towards 6%, advice is to stop harvesting, and restart early in the morning (better than late in the evening because the moisture may have reached the seed rather than just the pod). Wetting oilseed rape is not recommended, as it is often uneven, rather, mix it with some wetter seed to make an average moisture within the tight band.

 Cereals

The barley harvest too is under way. It is early days and the better yields are always reported first so we reserve our judgement for a month. Barley harvest in France is a quarter through and moving northwards quickly. The very first wheat crops are starting to be cut now too, but it is too early to make any useful comments about it.  More next month.

Globally

Most combinable cereals are grown in the Northern Hemisphere, so our harvest time will be more or less in line with most others’. Across the EU, harvest is quickly moving northwards, with considerably better results than the poor yields from last year. The Black Sea region and Ukraine are also harvesting, with yields up on last season, although the Russian harvest is smaller than initially projected.  North America, the main breadbasket of the grain exporting world is wading through its winter wheat harvest, now being three quarters completed and in China, another large crop is being gathered.

Within a month, the analysts will start publishing their expectations of crop sizes, based not on planted area and trend yields, but more on actual reports coming in from the fields.

This all sounds rather bearish, and often is for a short period, whilst buyers identify what is available, in terms of quality, quantity and location. The calculators then come out and the premiums are established. We note that as the population continues to rise, the overall demand for grains is also increasing every year, and so to simply stand still, the world needs to harvest a record crop each year.

Marketing

When it comes to marketing our combinable crops this year, we should be more focused on the impacts of a Boris Brexit than the actual marketplace itself. Yes, we acknowledge we made similar comments following last season’s harvest and nothing happened, but there is still a chance that Brexit will actually occur, and more importantly, that it might do so without a deal.

Those with combinable crops to sell are reminded that exporters are not able to book sales to the EU post-Brexit day, because they do not know what the price will be (tariffs or no tariffs), so grain long-holders (farmers) should consider the risks and benefits of holding grain unsold into the autumn. Bear in mind that oilseeds have no tariffs so should not be affected by them, beans have only a low tariff and are mostly exported to non-EU destinations so should be similarly unaffected. However, the cereals are potentially holding a lot of value at the moment because the tariff structure protects them. We will probably have a surplus of feed wheat and oats this year so it might be prudent to pass the risk of these crops elsewhere sooner rather than later (i.e. selling them).

Boris and Agriculture

Boris Johnson finally got the job he has been chasing for so long when he became Prime Minister on the 24th July.  Quite what he will do with his prize now he has it is not entirely clear.  Both he, and his leadership rival Jeremy Hunt, competed to be ‘tough’ on Brexit and Mr Johnson has repeatedly stated that the UK will leave the EU on the 31st October ‘come what may’.  This seems to heighten the risks of a ‘No Deal’ Brexit and the massive disruption to the farming sector that would cause.

Mr Johnson has repeatedly stated that he wants to do a deal with the EU, but would not accept the agreement on the table that Theresa May negotiated.  The Irish ‘Backstop’ remains the key point of contention.  All the noises coming from Brussels, and elsewhere in the EU, are that the existing deal is not open for renegotiation; however, they would be open to reverting back to a ‘Northern Ireland only’ version of the Backstop which was originally proposed by the EU but had to be changed to a UK-wide version at the insistence of the DUP.  That said, the prospects for such a reversion would be bleak given that the Conservative Government is dependent on the DUP. The Parliamentary arithmetic to get ‘No Deal’ through also looks problematic.  Mr Johnson will have the shortest of honeymoon periods before having to negotiate a very difficult political landscape.  Many political commentators think that an autumn General Election may be the result.

Whilst the main impact of a Boris Premiership on farming will be the eventual trade implications, other issues also arise.  It is not clear whether the current plans for English farm support will survive the Cabinet reshuffle that has seen Michael Gove move from Defra (see other article).  In his first speech as Prime Minister Mr Johnson pledged to ‘liberate’ the UK from ‘anti-GM rules’.  The coming months and years will see if this is just rhetoric, or whether the UK will really start to diverge from EU rules and regulations – not just on GM, but in many other areas.  On labour availability, another key Brexit issue for farming, Mr Johnson is said to favour an Australian-style points-based system.  The detail of how this might be set up will be key to addressing agriculture’s labour needs.  In any event, it seems interesting times lie ahead. 

 

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. 

Brexit – North-South Cooperation Areas

On 20th June, details were released of an exercise which outlined the scale of the areas of north-south cooperation on the island of Ireland which could be affected by Brexit.  This exercise informed the UK-EU negotiations which led to the emergence of the Irish backstop.  It shows that there are 142 areas of cross-border cooperation encompassing healthcare, policing, the environment and, of course, agri-food.

Nearly 30 of these areas of cooperation (20%) have direct linkages to agriculture whilst a further 17 are linked to water, waste and the environment.  Areas relating to agriculture and food include;

  • Food safety: linked with the application of EU Regulation 178/2002 on General Food Law.
  • Trade: appears in various guises, whether related to North-South trade promotion (via InterTradeIreland) or the management of cross-border trade with respect to the joint management of customs, transit of goods, mutual recognition of authorised economic operators (AEOs) etc. It also includes collaboration on promoting dairy trade.
  • Common Agricultural Policy: discussion around policy choices and implementation issues which are faced by both jurisdictions on the island of Ireland. It does not involve policy formulation.
  • Rural Development: EU LEADER cooperation including the facilitation of application for funding for collaboration projects including landscape management.
  • Plant health and associated regulatory checks for quarantine pests: a working sub-group oversees cooperation on plant health, pesticide and bee health issues and joint actions delivered through a joint work programme. This area has linkages to external border controls (documentary checks, identity checks etc.) relating to external trade in these products.
  • Collaboration on regulatory checks on live animals and products of animal origin: cooperation encompasses information exchange on consignment movements and trade as well as discussions on topics of mutual interest including the registration of traders and the use of the Trade Control and Expert System (TRACES) which controls the import and export of live animals and animal products in the EU. This area is seen as crucial towards avoiding a hard border. 
  • Animal health, welfare and disease control: includes collaboration initiatives on Tuberculosis (TB) and Brucellosis, veterinary medicines regulation and trade as well as animal transport.
  • Equine industry collaboration: covering cross-border movements and strategy development for the Irish equine sector.
  • Academic partnerships in agri-food: encompasses a variety of partnerships to promote cross-border initiatives including access to research funding as well as programmes to provide a range of higher and further education courses in agriculture.
  • Farm Safety: initiatives to jointly manage issues across the island.

Overall, the information released by the EU Commission and DExEU reveal the extent to which north-south collaboration has evolved over the past 21 years since the Good Friday Agreement.  Tellingly, many of the 142 collaboration areas go well beyond the technical and fiscal aspects of customs and single market regulation and it is implied that technology alone will not be able to solve all of the challenges posed by the Irish backstop trilemma.  Undoubtedly, the continued operation of the Common Travel Area facilitating the free movement of people across the island of Ireland and the UK will be a crucial component of tackling the issue.  However, there are many unanswered questions in other areas, particularly the regulation of agri-food trade which the UK Government will need to address.

To this end, DExEU have also announced the establishment of a Technical Alternative Arrangements Advisory Group to explore alternatives to replace the Irish backstop by the end of 2020. The group will be co-chaired by the Brexit Secretary, Steve Barclay, and Jesse Norman (Financial Secretary to the Treasury) and includes several Northern Ireland-based members (e.g. Declan Billington, Michael Bell and Dr. Katy Hayward) who have been to the forefront of tackling Brexit challenges, particularly from an agri-food perspective. Having such Northern Irish involvement should hopefully lead to more realistic proposals on how to obviate the need for a Backstop in comparison with previous initiatives which have repeatedly come up short in terms of understanding and addressing the complexities involved.

Brexit Update – ‘All Change Please’

Earlier this month, we reported that Theresa May would try to get her Brexit Deal passed one more time.  Instead, Conservative backbenchers played a key role in calling time on her premiership and she is to resign on 7th June.  This has triggered a Tory leadership context and (at the time of writing) eleven candidates have put their names forward, including the Defra Secretary, Michael Gove.  With the Conservatives’ leadership contest to take place during June and July, a new Prime Minister will be in place by the time we reach 31st October, the UK’s current expected departure date from the EU.

For UK food and farming, a change in PM is likely to bring changes to Ministerial personnel and overall Government direction, irrespective of whether the Defra Secretary emerges victorious or not.  This could, in turn, mean changes to the Agriculture Bill which has already been subject to delays (currently awaiting details of its third reading) in its passage through Parliament due to the paralysis of Brexit.  Although Defra is continuing to develop its thoughts on future agricultural policy, there is still a significant degree of uncertainty surrounding the precise policies that will eventually emerge.

The Change theme is also evident in Brussels following recent European Parliament elections.  The focus is now shifting towards who will lead the next European Parliament and who will lead the European Commission and European Council from 1st November as the presidential roles for both of these institutions are up for renewal.  On 29th May, it was announced that Sabine Weyand (Michel Barnier’s Deputy Chief Negotiator in Brexit) is to become Director General for Trade in the European Commission. No doubt, her Brexit negotiating experience will prove useful in this role and she is likely to feature prominently in any future trade negotiations between the UK and the EU post-Brexit.  She will also play a crucial role in the EU’s trade negotiations with Mercosur, Australia and New Zealand, all of which will have significant implications for European agriculture.

The make-up of the future European Parliament also merits consideration as the Green Parties’ influence has increased.  Again, this could signify challenges ahead with regards to pesticides regulation, the role of GM crops, agricultural emissions and other environmental issues of relevance to agriculture.  Of course, the extent to which this would be applicable to the UK long-term remains to be seen.  However, the policy direction of Britain’s closest neighbours in the world’s largest trading-bloc would still exert a significant influence, no matter what the eventual trading relationship is.

Impact of UK’s WTO Tariffs on Food and Farming

In April 2019, a study undertaken on behalf of the AHDB was published which focused on the impact of Brexit on Farm Business Income (profit) and prices under two scenarios.  The first is a UK-EU Free Trade Agreement (FTA).  The second, a No Deal Brexit which incorporated the UK’s proposed WTO tariffs which it published in March.  The study, led by Dylan Bradley and Professor Berkeley Hill was an update of similar work undertaken in 2017.  It primarily focuses on English farms.

In addition to tariff impacts, the analysis also assumes that whilst direct payments in England would reduce by £150 million, public good payments would increase by the same amount, thus leaving the overall level of support unchanged.  However, permanent non-UK labour would be restricted to 50% of current levels, although seasonal labour would continue to be supplied via a Seasonal Agricultural Workers Scheme (SAWS).  Trade facilitation costs as a result of non-tariff barriers would also ensue, costing 2% for crops and 5% for livestock in an FTA scenario and rising to 4% for crops and 8% for livestock under a No Deal.

In general, Farm Business Incomes (FBI) fall under both an FTA and a No Deal (WTO) scenario.  Under an FTA scenario, the effects are most pronounced in general cropping (-30%), dairying (-18%), pigs (-42%) and cereals (-19%).  A key explanatory factor for these farms is the increase in labour costs associated with less permanent labour availability.  However, beef and sheep is an exception where incomes remain close to the baseline level.

Under the WTO scenario, FBI falls further across all sectors.  Cereal farm income declines by 29%, general cropping incomes are 35% lower than the baseline and dairying incomes are 22% lower.  It is also under this scenario where beef and sheep (both lowland and LFA) also decline significantly, by approximately 50%.  Across all farm types, production revenues decline with the impact of tariffs being particularly problematic for sheep production.  In the beef sector, the imposition of a new 230Kt tariff rate quota (TRQ) for imports, which would be available to a everyone (i.e. EU and non-EU countries), would seriously erode farm-level prices.  The projected price impacts as a result of the modelling undertaken in this study, as summarised by the AHDB, is set-out below.  However, it must be borne in mind that the modelling process used to derive these calculations are acknowledged by the authors as being a considerable simplification of reality.

Unsurprisingly, given its exposure to the EU market in terms of exports, the most pronounced price decreases are in the sheep sector with declines of 5% (FTA) and 25% (WTO) forecast.  For beef, a 4.3% rise is projected under an FTA scenario, mainly due to trade-facilitation impacts but a 4.6% decline is projected under WTO as lower cost imports from the world market exert a negative influence.  Some increases are also forecast for wheat under both scenarios and are again a reflection of trade facilitation costs.  In contrast, barley prices are forecast to decline and here restricted access to the EU market for barley exports in particular are influential, especially under a WTO scenario where market access would be subject to tariffs and access for malting barley exports via TRQ which would be heavily restrictive.  As a result, the areas of wheat are projected to increase at the expense of barley, subject to agronomic constraints.  The prospects for milk prices are more positive with rises projected across both scenarios as imports from the EU become less competitive due to trade facilitation costs.

SectorUK-EU FTAWTO Scenario: UK Tariff Schedule
Wheat+2.3%+3.6%
Barley-2.0%-12.1%
Oats+0.1%-3.0%
Oilseed Rape-2.0%-4.0%
Potatoes+1.8%+3.6%
Carrots+1.2%+2.4%
Sugar Beet+0.8%+1.1%
Milk+2.6%+3.8%
Beef+4.3%-4.6%
Sheep-5.0%-25.0%
Pigs+3.4%-4.8%
Poultry+1.5%+2.3%
Livestock feed+0.7%-0.8%
Poultry feed+1.3%+1.1%
Fertilisers+0.9%+4.9%

Source: AHDB (2019) and Bradley and Hill (2019)

Overall, the study’s findings suggest that restricted labour availability could have a major impact on farm profits even if the trade impacts under a Brexit Deal scenario are limited.  This highlights the importance of labour to food and farming generally and shows that adequate access to labour, whether it is from the EU or elsewhere, will continue to be crucial.  Other studies assessing trends in farm-level costs have shown that overheads have risen substantially in the past decade and that effective control of these costs is crucial to farm profitability. 

Further information is available via:

https://projectblue.blob.core.windows.net/media/Default/Imported%20Publication%20Docs/Horizon/Understanding%20Brexit%20an%20impact%20assessment_final11April2019.pdf

https://projectblue.blob.core.windows.net/media/Default/Imported%20Publication%20Docs/Horizon/Brexit%20Scenarios_Final%20Report_11April2019.pdf