Brexit and UK Agriculture

The 23rd of June 2016 will go down in history as one of the most pivotal moments in British history. At a stroke, the Brexit vote took the UK out the EU exit door leaving us rudderless, with our Government scrambling to work out how to unpick over forty years of integration with our European neighbours.

Brexit means Brexit we are told, but what on earth does it mean for UK farming? There are deeply polarised views over what people voted for in the referendum and that has led to a battle at the heart of the UK Government between those who want a hard Brexit and those who want a soft one.

In Europe 27 countries and the European Parliament all with differing interests have a veto on any Brexit deal making it extremely difficult to try and predict the eventual outcome. I have, therefore, set out the process; the big issues; the threats and opportunities and rather gingerly tried to draw some early conclusions on what a post Brexit future might look like for the UK Agriculture industry.

UK Agriculture at the Sharp End of Brexit

The UK agriculture industry is the most intertwined with the EU and, therefore, the most exposed to the massive changes leaving will bring about. So far, the Brexit vote has boosted the fortunes of farmers across the UK as the pound fell steeply, bringing much needed uplifts in both farm-gate prices and CAP payments. With CAP support guaranteed by the UK Government through to 2020, UK farmers can, I believe, look forward to a period of relative stability. However, this may well be a honeymoon period before the storm breaks.

The Divorce

A leading Labour MEP Richard Corbett described Brexit as the mother of all divorces and he is right. No member state has ever left the EU so there is no precedent or experience to draw on. The UK Government has promised to pull the trigger on Article 50 in March and it will then enter into negotiations with the other 27 Member States to extract the United Kingdom from the EU treaties that govern our relationship with the EU and the rest of the world.

The main issues will be apportioning the financial liabilities, dividing up EU import quotas for the likes of dairy, beef, sheep, pig meat in the agriculture sector and figure out what happens to the EU quangos that are currently based here in the UK.

The UK Great Repeal Bill will make its way through the UK Parliament repealing the European Communities Act and transferring all EU laws into British laws. The legislation will be substantial and there will be many vested interests seeking change, so getting it through Parliament before Brexit day in March 2019 is likely to be a mammoth task for a Government with a tiny majority.

The Post-Divorce Relationship

Alongside that, a separate negotiation will try and secure a postdivorce relationship between the UK and the EU and this will be by far the toughest to agree. Our own Government currently cannot agree on what it wants from a future relationship with the EU never mind what the other twenty seven countries who we are negotiating with might want from that relationship.

However, we do know there are some fundamental issues where there will be big differences between what the UK will ask for and what the remaining EU will want to give. The first big argument will be over how much the UK has to pay to cover EU liabilities it has accrued and how much we have to pay for continued access to EU markets?

Secondly, immigration will be a huge area of contention. Will the UK accept free movement of EU citizens as the price of staying in the single market or will we insist that we take back control of immigration and give up on single market access?

The third issue is access to the single market. Continued access is vital for UK food producers with the EU taking 70% of our exports but the UK Government may well decide that free movement is a price that is too high to pay for access and instead opt for some sort of a free trade deal.

Another major issue is whether the UK stays in the EU customs Union. If we stay, it would prevent us negotiating our own Free Trade Deals. If we leave, we would be forced to re-negotiate new deals with the fifty countries who currently have a trade agreement with the EU.

A battle is currently raging within the UK Government on whether to take a soft or hard approach to these key issues. It is, therefore, really difficult to predict what the UK red lines might be. However, we know the timescale for the divorce is two years as set out in Article 50 of the EU treaties, but nobody believes the post-divorce relationship can be agreed within that same timescale. Typically trade deals such as the EU/Canada agreement take on around seven years to negotiate and nothing is agreed until everything is agreed. That begs the question as to what happens to our food exports to the EU if we are out the exit door in 2019 but a new UK/Europe trade deal isn’t agreed until 2024.

Do we fall off the cliff edge after two years as EU tariff barriers make UK exports uncompetitive and cause substantial economic damage to our economy, or will a transitional agreement be brokered to allow time for a final deal to be reached? No doubt, a transition agreement would bring howls of outrage from the Brexiteers claiming it would in effect extend our EU membership. The Prime Minister, however, recognized industry concerns at the recent CBI conference and signalled that she was considering some kind of transition to avoid damaging the UK economy.

What the Divorcees Want

In the UK debate we hear little of what the remaining countries in the EU might want out of any Brexit deal. All 27 Countries have a veto on the final agreement and they will have strong views on what they want out of that negotiation. The European Parliament also has a veto on the deal so their demands will have to be satisfied.

It is claimed by many of the Brexiteers that the EU countries will be falling over themselves to do a deal that keeps BMWs and Prosecco flowing into UK markets. What nobody seems to understand is that the EU without the UK will be a totally different beast to negotiate with.

For a start, the more protectionist Southern European countries now find themselves in the majority which coupled with the rise in anti-trade sentiment is likely to make the trade issues much more difficult to reach agreement on. The Eastern European countries led by Poland are now more powerful players in the EU and they are not going to sit back and allow their citizens’ rights to work across the single market to be traded away easily.

The European Parliament led by my former leader Guy Verhofstadt will vote through a resolution in March outlining their demands and it will set out some very tough red lines on money, free movement and access to the single market.

So, the idea that it is for the UK to decide what Brexit should be and the rest of Europe willingly signs up to it is fanciful nonsense. Let us be in no doubt there are powerful reasons for both sides to reach an agreement but it will take a good deal of pragmatism, understanding and respect by both parties for a mutually beneficial deal to be agreed. So far, there has been little sign of that in the public debate.

The Opportunities

Given the huge complexity and uncertainty around Brexit it is difficult to predict what a post Brexit British Agricultural industry might look like. However, it is possible to highlight some of the opportunities and threats for the UK beef industry. I believe, there are exciting opportunities in front of us as we free ourselves from the rigidity of the one size fits all approach of the EU.

For a start, we have a wealthy home market for quality British beef allied to rising worldwide demand for beef products in developing countries. The UK is currently only 75% self-sufficient in beef so there are opportunities to displace imports.

Getting rid of the one size fits all CAP and developing a flexible and targeted UK Agriculture Policy tailored to the needs of British agriculture allows us an opportunity to provide a framework for the beef industry to increase productivity and grow. We should be able to simplify some of the burden of regulation and rules that currently make life difficult for farmers.

Freed from EU rules we should also be able to develop better classification systems and promote the British label in key export markets. With the right regulatory framework in place the UK could become a world leader in new breeding techniques delivering substantial opportunities to make productivity gains right across UK agriculture.

A hard Brexit whereby the UK is out of the EU single market and operating under WTO rules with tariffs erected could potentially lift UK beef prices and render Irish beef imports uncompetitive.

The Threats

However, against the undoubted opportunities arising from Brexit there are also substantial threats. Currently British beef enjoys one of the highest prices in the world and strong financial support from the CAP, yet margins are wafer thin and the majority of beef farmers struggle to make a profit without financial support.

Therefore, one of the biggest threats is the risk that farm spending will be slashed post 2020. UK farm Minister George Eustice seems to be hinting that direct payments will be dumped and instead payments for welfare and environmental ecosystems will be the focus of a new farm policy backed up by some sort of risk insurance. How much money will be attached to these types of Stewardship schemes and whether the beef industry benefit from them will be crucial questions given how reliant the sector is on current payments? If UK farm budgets are reduced significantly UK beef producers will also find themselves at a competitive disadvantage against heavily supported European competitors.

There are also significant question marks about devolved Government’s willingness to sign up to an overarching UK farm policy. If they develop their own policy priorities I am sure the Scottish Government will back their beef industry but will England and Wales choose to do so? Different support levels across the UK in future will inevitably lead to distortions across the UK beef market.

Inside the EU, beef markets are heavily protected by TRQ’s (import quotas) and high import tariffs. When the EU negotiates with the third countries such as Brazil and the USA, beef imports are always a massive red line for the EU in the negotiations. Will the UK beef industry still enjoy that high priority when our own Government negotiates free trade deals in future or will the car and financial services industry take priority? There will be a substantial threat to the future profitability of the UK beef industry if the flood gates are opened and cheaper beef imports pour into our markets.

Another threat comes from possible tough UK rules on EU immigration as the beef processing sector is heavily reliant on EU workers. Without access to that pool of labour the whole future of the industry could be under threat.

Everywhere you look there are more questions than answers, but, I believe, it is the sheer uncertainty of the whole Brexit process and timescale that brings the greatest threat to the UK beef industry as farmers lack the confidence to invest in their future.

Conclusions

As I said at the outset, it is very difficult to try and predict what a post Brexit beef industry might look at this early stage, however, there are one or two conclusions we can start to draw.

• There will be a transitional agreement allowing continued access to EU markets beyond 2019 allowing industry time to adapt and a post-divorce
relationship to be agreed.

• The industry will, I believe, still have access to EU labour.

• Ireland exports 60% of its beef to the UK and they will play a key role in trying to keep the UK in the single market.

• Brexit will mean less direct financial support and a more competitive market place from imports from third countries.

• Direct payments in England and Wales will be phased out and replaced with payments for environmental services and some sort of risk management.

• Specialist upland beef producers in England are, however, likely to receive reasonable levels of support but heavily linked to delivering environmental services.

• There will be significant divergence in future farm support across the UK as the devolved Governments go their own way on policy.

• Farm Unions will need to up their game as every three years they will have to battle against health and education priorities for Agriculture funding in the UK spending review.

• Science based decision making and a simpler regulatory regime for biotech opens up the possibility of the UK being a world leader in this area.

• The changes in the market place will force UK farmers to prioritise productivity and competitiveness and the support system will pay them to deliver environmental services.

There is no doubt there will be real opportunities from the changes Brexit will bring for farm businesses to exploit and grow but for those who are struggling to make a decent return the period through to 2020 might well be the time to have a good hard look at their future.