April 7, 2016

By Garrett Baldwin

Bank of England Governor Mark Carney has been scrambling to convince voters that leaving the European Union would be the single largest risk to the nation’s economy.

On June 23, a referendum vote is set to decide the future of the nation’s membership in the European Union. But while Prime Minister David Cameron and Carney are ringing the alarms, a number of high-profile MPs are pushing for the nation to walk away from the Great European Experiment.

The United Kingdom’s departure from the European Union would be a dramatic economic event in this young century, and could offset a wave of other nations attempting to depart the globe’s largest economic bloc. Drilling down into the agricultural sector, however, there are strong supporters for both those in favor and those opposed.

Some reports argue that a potential exit from the European Union by the United Kingdom would completely devastate the British agricultural sector in ways that haven’t been written about since  John Steinbeck finished the final pages in The Grapes of Wrath. A confidential client report by agricultural consultants at Agra Europe projects that a wave of debt foreclosures would ensue given that British farmers would not be receiving subsidies under the Common Agriculture Policy (CAP). But such reports rely on one critical assumption: That the United Kingdom will not do anything to support its agricultural trade in the event of its departure from the European Union.

“What is certain is that no UK government would subsidize agriculture on the scale operated under the CAP,” the report states.

That’s likely true since 40% of the European Union’s budget is dedicated to CAP each and every year. However, that level of spending is also part of the argument in favor of the exit. To some critics of EU policy, England is paying too much into the system, while its farmers are receiving too little in return.

This article examines the arguments in support of and in opposition to the idea that British farmers would be better off no longer operating under the Common Agriculture Policy.

Those Opposed, Say Nay…

The EU’s agricultural policy may be common, but it’s far from simple. Under the rules, CAP pays farmers for the land they operate and individual efforts to improve environmental standards.

The strongest argument against the British exit centers on the short-term concerns about debt and financing operations. CAP subsidies are the lifeblood of the farming sector right now. Currently, there is anywhere from £2.5 billion to £3 billion each year on the table for U.K. farmers. That amount of money is the difference for many on whether they operate at a profit or a loss, particularly in a low-price environment for global food commodities.

The U.K. imports two and a half times more from the EU than any other nation in the world, while EU markets buy more than 50% of all British food and farm exports, providing the nation with £11 billion annually. Although the U.K. might be able to sign new trade agreements with other global producers, leaving the EU would have economic consequences. The resulting new tariffs would indeed fuel rising import costs while England would lose its integration with the EU’s 500 million consumers and free trade rules, according to England’s Defra Secretary, Liz Truss, who called an acceptance of the Brexit “a leap into the dark.”

Walking away right now would leave a lot of money on the table. Between 2014 and 2020, British farmers are set to receive nearly £28 billion in subsidies.

On the short term, farmers want to stay in business, but the great question is whether or not the UK government would cover the subsidies immediately to keep its farms operating.

Those in Favor Say, Aye…

A departure from the EU could likely fuel the single largest change in agricultural economics in England since the Importation Act of 1846, which overturned the Corn Laws and the massive import duties imposed on the country for three decades.

Notable names in the sector have called for change. George Eustice, Parliamentary Under Secretary of State for Farming, Food and the Marine Environment said recently that the nation would be better off from a policy perspective.

“We would do far better as a country if we ended the supremacy of Europe and shaped new fresh-thinking policies that really deliver for our agriculture,” he said in a recent speech.

Additionally, there is the general opposition to the European Union itself. Britain has never been willing to go all-in on the European Union, even operating on a two-currency system that has ensured the continued circulation of the Pound. As the second-largest economy in Europe, there remains a distrust from across the Channel.

At the center of the argument is the perceived bureaucracy of the European Union and what amounts to a large overpayment to other members of the economic bloc. Farming innovation is effectively banned, since it must remain on pace with the rest of the EU’s regulatory system – an archaic attempt to level the playing field. Leaving the European bloc would also provide the UK the opportunity to establish its own regulatory system to oversee controversial matters like GMOs and pesticides.

“The truth of the matter is that if we left the EU there would be an £18 billion a year dividend, so could we find the money to spend £2 billion a year on farming and the environment?” asks Eustice, “Of course we could. Would we? Without a shadow of a doubt,” he adds.

Pro-Brexit Advocacy group BetterOffOut argues that the best policy makers to control British agriculture are British. The group advocates that operating under a smaller subsidy system would prevent wide-scale abuse in the system.

British journalist Nigel Farndale explains that British taxpayers currently pay roughly £6 billion annually into the CAP. However, farmers only receive roughly £3 billion in return. Farndale argues that British farmers are actually subsidizing their competitors in France, which receives the most in payments.

BetterOffOut explains that France receives roughly 17% of the pie, compared to England’s 7% figure. In addition, the group uses Truss’ own words against her by pointing out the bureaucracy and lack of variability offered to U.K. farmers. “The three crop rule means that Brussels bureaucrats are going to be deciding what our farmers produce, rather than what consumers want, which is a problem.” Truss once said, referring to a CAP rule that requires farms with more than 30 hectares of arable land to grow three different crops.

In Conclusion

Looking forward, a Brexit would cause a massive ripple effect across the European Union and in global markets. At the agricultural level, the short-term impact could be significant and drive many farmers out of business unless the U.K. is able to match subsidy levels. Foreign investors will be waiting for some big news on June 23.