November 30, 2016

On June 23, 2016, voters in the United Kingdom channeled Groucho Marx and decided to leave a club that actually wanted them as a member. Although the National Farmers Union officially favored remaining in the EU, a significant majority of farmers (in some polls almost 60 percent) wanted to leave. This sets up a fascinating conundrum: how can views of the union representing farmers be so at odds with the membership’s views, and are there any indicators of which side will, in the end, be proved right?

Government figures show that for the third consecutive year, farm incomes have fallen in the UK. Dairy and pig farmers have been particularly hard hit. Some of this has been attributable to declining international competitiveness of British exports, largely but not entirely linked to the strength of the pound. Low global commodity prices and intense price competition between supermarkets, both of which seem likely to continue, have also played a meaningful role. Farm incomes have been falling elsewhere, too. But if the pound has been such a significant factor, the decline in its value since June 23 might be expected to alleviate some of the pressure.

UK farming relies heavily on access to labor for seasonal work and increasingly on international trade. Total food and drink exports from the UK totaled £18 billion in 2015; imports, on the other hand, were more than twice this amount at £38.5 billion. In percentage terms, about 27 percent of all food consumed in the UK in 2015 was imported from the EU, making the EU as a whole by far the UK’s largest single food supplier – more than the rest of the world combined in fact. Government figures show that some 400,000 people in the UK are employed in farming, a not inconsiderable number for sure.

About Brexit as a whole there are facts that are known and ‘facts’ that are really more speculation. In the former category are macro items, the need to invoke Article 50 to initiate formal negotiations being by far the clearest. While precise timing may be affected by the decision of the High Court on November 3 that this requires Parliamentary consent and the inevitable government appeal that will follow, no one seriously expects the referendum decision to be reversed. There is also no doubt that any eventual agreement with the UK will require the assent of all remaining EU members, and the politics around this are not expected to make this process simple, or even predictable.

Hence post-Brexit outcomes for UK agriculture are, at this stage, highly uncertain. This by itself simply creates ideal growing conditions for numerous theories on both sides of the debate.

Some things seem more plausible based on known information today: the decline in the value of the pound since the referendum, if sustained, will likely help exports but will make the large volumes of imported products, including much of the machinery that farmers actually use, more expensive. So farmers’ capital costs can be expected to rise as can prices for food. Early indications are that they could be steep. Tesco, a supermarket chain, recently fought successfully to resist a manufacturer-led 20 percent price increases on Marmite, a yeast extract spread, although Morrisons, another supermarket chain, succumbed to a 12 percent increase. Competition in the food retail sector may constrain headline price inflation, but reports that food companies and retailers are shrinking package sizes to keep prices constant simply obfuscate the reality of price pressure. If this practice is continued, it can be expected that farmers’ sales, in volume terms at least, will also decline.

Back on the farm, there are additional questions about the impact of the end of EU subsidies and what leaving the EU will mean for agricultural land values. During the referendum, campaign promises were made to assuage farmers’ concerns around government support. Whether these can or will be fulfilled is a matter of conjecture at this stage; the case for leaving the EU was enhanced by whatever assurances were given by the Leave campaign and the hope expressed by some that falling land values would have an equivalent impact on farm rents. It would seem more likely that a weak currency and the indirect support to farmland prices from inheritance tax relief will continue to buttress value; on the other hand, as part of the 2016-2017 budget the government had already increased stamp duty on land sales, which may contribute to some reduction in rates of growth.

There seems to be some consensus regarding the challenges of negotiating the terms of exit from the EU. These include whether or not access to the single market will continue and whether current trading arrangements will have to be replaced by new Free Trade Agreements that need to be negotiated bilaterally with multiple trading partners. None of these can be agreed, or even negotiated, until the process of leaving the EU is finalized, which may take longer than the two years prescribed under the famous Article 50 that remains to be invoked. There are major questions about the duration risk associated with Brexit negotiations that will – or can be expected to – impact both agriculture and the broader economy. As drafted, a two-year window is allowed to reach agreement, and failure to do so would default to arrangements under WTO rules. Whether an extension can or would be agreed, for example, to extend the negotiations, if needed, is unclear.

It is difficult to be bullish about the prospects for grains and oilseeds post-Brexit. These are freely traded globally and costs of production are lower in many larger producing countries than in the UK. New tariffs on exports of these crops to the EU would likely be very damaging to growers, simply because they would exacerbate the production cost differential. Reciprocal tariffs on imports will expose British consumers to higher prices domestically and challenge supply chains reliant on foreign-sourced crops.

On the other hand, the optimist’s view is that Brexit could be a catalyst for new agricultural opportunity across other segments of the industry. With the usual caveats related to final terms of trade (including levels of tariffs, if any, to be implemented) new export markets for British beef, especially premium cuts of the grass-fed variety, could be opened up, though this would likely also be matched by increased imports from such large producing countries as the U.S., Australia and South America, where costs of production are low. Another example may relate to pork, where Britain is a net importer (and virtually all imported pork comes from the EU, where high tariffs limit imports, even though EU production costs are higher than in other countries). Discrete opportunities could also exist in poultry and potatoes, where processed products like potato chips, which currently have a small export market share, could find new markets.

As we await the moment when the UK formally invokes Article 50 and commences the process of negotiating the country’s exit from the EU, there is all to play for. As of now, the attitude of the government to the agriculture sector, and the quantum and allocation of any eventual government funding for the sector, is still not fully known. There is some sentiment that resources should be devoted to supporting smaller (family) farms, whose size and relative financial weakness could leave them more exposed to market forces than larger farms are perceived to be. Some support for this can be seen from the fact that dairy farmers, who are suffering from low milk prices across the EU (although this scenario is playing out across the globe now, too), will receive some relief following a decision to allocate money from a £16.2 million EU emergency dairy fund to encourage grass-based farming systems.

It is legitimate to ask how certain availability of such funding will be post-Brexit, when the UK government alone would have to find the money itself. The importance of large political bugbears such as the National Health Service, about which assurances have been given both during and since the referendum, and the need to support manufacturing jobs, could place the government firmly between the proverbial rock and hard place. Nissan seized this, and appears to have extracted very open-ended financial assurances to agree to manufacture two models at their plant in Sunderland in the event that tariff-free access to the single market is lost in the Brexit negotiations. Will farmers have the same clout? Politicians’ fears related to likely electoral reactions from consumers angry about either rising food prices or, worse, food scarcity, could be the farmers’ best ally.

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David Gray, Senior Advisor to Altima Partners in London, is a member of the speaking faculty at Global AgInvesting Europe in London, December 5-7, 2016.

The opinions expressed in this editorial are the authors’ own and do not reflect the views of GAI News.