Brexit – Implications for Farming

The vote to leave the EU will have profound effects on UK farming sector and those that do business with it.  It is important to point out that Brexit will not formally happen for at least two years (possibly longer – see previous article).  Farmers, companies, government and the whole industry will have time to adapt.  But the changes could be great, and businesses need to think about how Brexit could impact them.

1. Closely monitor exchange rates as they will have a major impact on short-term competitiveness:  Sterling has already weakened significantly against the Dollar, and somewhat against the Euro.  On the face of it, this will be positive for UK agricultural produce in the short term as it will be more competitive vis-à-vis exports.  Also, as the UK will remain in the EU for at least two years, UK farmers will receive more in direct payments which are denominated in Euros. However, it is also important to note that prices for key inputs which are imported (e.g. nitrogen fertiliser) are likely to increase and this could also happen with other key inputs such as fuel and ag-chemicals. Added to this, if there is a significant enduring devaluation in Sterling, the prospect of inflation also starts to emerge which over-time will negate the positive impact of a weaker sterling to farmers.

2. Understand the trade flows that affect your business:  As alluded to above, the prices of key inputs are likely to be in a state of flux as Brexit starts to play itself out in the markets.  The same will apply to outputs.  This may provide short-term opportunities.  Longer-term, businesses should identify where their inputs come from and where their products go.  That is, they should determine what percentage are within the domestic market, what percentage are traded to and from the EU-27, and what percentage are on the wider world market. This will help to understand the scale of the potential issues arising from any re-introduction of tariffs or customs checks so that companies can react quickly as new arrangements are announced. 

3. Quantify the potential impacts if direct payments are reduced under a British Agricultural Policy: whilst Vote Leave has claimed that agricultural subsidies would not be reduced until 2020 (note that the UK may still not have left the EU until then), longer term, there is likely to be some impact.  Whilst in theory, the UK could replicate that CAP and still have £8.6bn left over from EU contributions, the reality is that it is not that simple.  The UK economy is likely to suffer a downturn in the shorter term upon Brexit and this will mean that public sector funds will come under pressure.  In that scenario, key spending areas like the NHS will be priorities and agriculture is likely to be negatively impacted.  Our view is that support will not reduce substantially upon a formal Brexit; but there could be a small drop – say 20% on current levels.   However, over time (e.g. 5 years), subsidies are likely to be eroded and overall spending could end-up at 30-40% of current levels.  The targeting of this spending could well change once the UK Government had a ‘blank sheet of paper’.  Support is likely to be more focused on hill-farming  and environmental actions (and perhaps competitiveness). Some sectors, e.g. lowland farming, may get no support at all ‘as of right’.  This will have significant implications for how much farmers could afford or be willing to pay.  This may affect direct suppliers such as manufacturers of machinery and equipment for example, but may also affect those that sell services to the farming sector.  There is likely to be an effect on land prices and rents as a result of the uncertainty about future payments.  In terms of rents, the BPS often passes straight through into a higher rental value.  Values will need to adjust if payments are to fall.  Land prices are less directly influenced by subsidy, as there are so many other drivers.  But the general uncertainty could well see values fall.

4. Assess how much your business relies on migrant labour and what contingencies are needed: it is estimated that UK agriculture employees 35,000 migrants on a permanent basis and many more on a seasonal basis.  For some sectors (e.g. horticulture) the impact could be substantial.  Therefore, companies should assess how reliant they are on migrant labour from the EU-27 and the potential impact that this could have on its operations. Whilst it has been mooted that migrants already living in the UK would not be forced to leave, it is likely that there will be extra costs associated with doing background checks, getting permits etc. that will also add to costs.  For new migrant employees, the process may be more complex.  Added to this, if your company employs migrants from the Republic of Ireland, it is likely that special arrangements could be put in place given the close historic ties between both countries.  This could mean that Irish employees are exempt from any arrangements with other EU member states.  Once the potential labour cost impacts of Brexit are better understood, companies would then be better positioned to quantify how their costs could change upon Brexit and how they need to plan their labour operations.

5. What new opportunities will be created?:  it is easy to focus on the negative impacts of a Brexit but when such upheaval occurs, opportunities do arise.  If land prices do fall this could present opportunities for farmers to expand.  With uncertainty, some may defer investments and this could mean that for those willing to do deals, they may benefit from reduced prices.  Furthermore, exchange rate volatility will present opportunities for some and there will also be opportunities associated with futures markets. However, opportunities related to financial markets can be highly speculative and should not be entered into without appropriate financial expertise.  Any new support and regulation regime imposed by a UK government may be more favourable.  Finally, there may also be opportunities for the UK agricultural sector to supply domestic and international markets arising from new trading arrangements.  For instance, dairy produce that may have previously come from France could be satisfied by local producers. However, such opportunities depend heavily on UK farmers being insulated from global commodity producers (e.g. New Zealand, Argentina) which may undercut domestic produce significantly.  Additionally, markets such as Egypt may be willing to do better trade deals with the UK once it is outside the EU.

Overall, the full implications of Brexit will take time to emerge.  As in most things, there will be winners and losers from the change, but change does bring opportunity.  We at Andersons will, of course, be monitoring developments over the coming weeks, months and years and analysing the impact.  If you need any support in helping to understand more fully the implications of Brexit for your business, please do not hesitate to contact us.