EU Agrees Mercosur and Vietnam Trade Deals

On 28th June, twenty years to the day that negotiations started, the EU and Mercosur reached a political agreement on a substantial free trade deal.  The EU estimates that, when fully implemented, the deal will reduce tariffs its exporters face by approximately €4 billion.  On a busy weekend for Cecilia Malmström, EU Trade Commissioner, the EU also signed the free trade agreement with Vietnam which had been largely negotiated in 2018.  Both deals are meant to send a message that, with the backdrop of the US-China trade dispute and the increased friction likely to result from Brexit, that the EU is open for business and keen to conclude trade deals with other global partners.   These announcements follow similar recent deals with Japan and Canada.  From an agri-food perspective, the Mercosur deal is attracting most attention as it could have significant implications for sectors such as beef, poultry and sugar.

EU-Mercosur Trade Deal

The details of the Mercosur deal are complex.  In summary, the South American trade-bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, would see tariffs removed on 92% of all its imports to the EU over a period of 10 years.  Focusing on the agri-food sector, tariffs will be cut on 82% of imports coming from Mercosur, with remaining agri-food imports subject to more partial liberalisation.  Notably, this includes beef where a quota of 99,000 tonnes will be permitted to be exported to the EU at preferential rates.  This will be implemented over a five-year period.  Additional volumes of imports will also be allowed of poultrymeat (180,000 tonnes) and pigmeat, (25,000 tonnes), with import restrictions on sugar and ethanol also eased.

From an EU export perspective, tariffs will be eliminated on 91% of its total exports and 95% of agri-food exports.  The dairy sector in particular will benefit from improved market access, with a quota of 30,000  tonnes for cheese, 10,000 tonnes for skim-milk powder and 5,000 tonnes for infant milk formula (Mercosur tariffs are currently at around 28% for dairy products).  These volumes will be phased-in over 10 years.   Whilst improved market access for dairy was welcomed in some quarters, market experts opined that demand for dairy products in the Mercosur market is quite lethargic and is hampered by high inflation, sluggish economic growth and a volatile political environment. 

Mercosur has also committed to protecting the Geographical Indications of 357 EU food and drink products.  The EU is also keen to point out that its food standards on Sanitary and Phytosanitary (SPS) matters would not be compromised in any way.  The EU-Mercosur deal also has a Sustainable Development chapter which commits both parties to upholding their Paris Climate Accord commitments

European beef, poultry, sugar and ethanol producers are expected to come under increased pressure from cheaper imports from South America as a result of this proposed deal.  The agreement has already attracted condemnation from the EU’s farming lobby with organisations such as Copa-Copega and the Irish Farmers’ Association (IFA) complaining that agriculture had been sold out to facilitate a wider deal.  Tellingly, the EU Commission also announced a €1 billion fund to help farmers to adjust to the market disturbances that could be potentially caused by the EU-Mercosur trade deal which indicates that there will be a significant impact on European farmers.

The feedback from the EU farming and food industry points to trouble ahead because, as our previous article on 26th June noted, the agreement thus far has only been at the political level and a number of hurdles remain.  Firstly, it will be translated into legal text before being put forward for ratification by EU Member States and the European Parliament.  Like the EU-Canada (CETA) agreement, there can still be several twists and turns in the process and the deal could be scuppered by a Member State or by a regional Parliament such as Wallonia.  Already, there is significant pressure being exerted on the Irish Government not to back the deal and it is anticipated that there will be similar calls elsewhere.

Any on-farm effects from this deal remain some way off, and in any case would be phased in over several years.  By the time this happens, the UK is likely to have left the European Union, so the impact of this particular deal might be negligible.  That said, the EU-Mercosur deal increases the competitive threat of South American products in European markets.  It is also likely to offer a template for any future trade deals between the UK and Mercosur which the UK is likely to prioritise post-Brexit. 

EU-Vietnam Trade Deal

This pact will eventually see duties removed on 99% of the EU’s imports from Vietnam.  Whilst the formal text has been approved by the European Commission, it still requires ratification by the European Council (representing the EU Member States) and by the European Parliament.  This is expected later this year.

From an agri-food export perspective, Vietnam with its population of around 95 million represents a fast-growing South East Asian market.  Its dairy industry is valued at approximately £5 billion and it currently imports 80% of this demand.  Average incomes have also been rising thereby driving demand for beef and pork products in particular, although the US and New Zealand account for the vast majority of these imports.

As with Mercosur, the UK’s pending exit from the EU means that it may not benefit significantly from this deal.  That said, much will depend on the length of the transition (implementation) period arising from the eventual Brexit deal and the UK’s access to third country market that have free-trade deals with the EU as part of this.  However, the South East Asian market is lucrative and the UK needs to prioritise the development of such markets as it resumes its independent trade policy.

This article is from Andersons’ AgriBrief Bulletin, a subscriber-based publication which provides readers with expert, concise and unbiased commentary on the key issues affecting business performance in the UK agri-food industry and what it means for you and your clients. For further information, including a free trial, please visit:

https://agribrief.co.uk/.

Arable Market Thoughts

It never rains, it always pours!  By early June, some were concerned about the dry soil conditions, by the end, the concern was flooding.  Most of the crops that had been flattened have picked up, but not all, increasing the risks of Fusarium.  Combinable crops now require sunshine to help them ripen with good quality and bushel weights.

The other thing that has fallen over this month (which we had been warning would happen) is the premium that the old crop wheat carried over new crop.  Sooner or later the two crop prices have to merge, and they did this decisively in June.  In fact old crop long-holders will be feeling frustrated by the chart clearly showing July 2019 futures values in January of £180 now being worth £145.  Also, new crop wheat prices have taken a sharp turn upwards, now clearly ahead of old crop.  This will encourage any buyers to take short term cover and close the gap.  Farmer sellers with adequate storage might be tempted to carry the grain over if it is in satisfactory condition.

Globally, the wheat crop is overall healthy and abundant, with expectations from the International Grains Council that it will outstrip consumption to leave slightly higher stocks this coming season.  This has helped explain the price falls in the market.  Maize though, the main combinable crop in the world, is thought abundant but not likely to match annual demand, so stock levels are expected (by the IGC) to decline again this year.  This will be the third decline since 2016/17 from 363 to 284 million tonnes; a substantial fall.

Soybean stocks are also thought likely to return a small decline in physical stock level after the 2019/20 season, although only by 1 million tonnes.  This is a tiny change after such a sharp rise in stock from 25 million tonnes to the current 53 million in only six years.  The question of how much oilseed rape will be grown in the UK is concerning many; whilst we have reported the poor OSR conditions on many farms this year, we have not pointed out that other arable farmers are quietly very happy with the condition of theirs. Some has been grubbed and replaced, other fields are looking excellent.

Bean crops are largely looking good throughout the country, and with new crop reaching good prices, perhaps now is the time to book some in.  Currently, we would expect bean crops to outperform their overall dismal performance from last year.

This article is from Andersons’ AgriBrief Bulletin, a subscriber-based publication which provides readers with expert, concise and unbiased commentary on the key issues affecting business performance in the UK agri-food industry and what it means for you and your clients. For further information, including a free trial, please visit:

https://agribrief.co.uk/.

How Has Farming Changed Since the UK was Last Outside the EU?

UK farming will soon be operating outside the European Union for the first time since we joined the, then, EEC in 1973. In preparation for its round of Spring Seminars, Andersons the Farm Business Consultants have looked into the archives to compare UK farming 46 years ago with today’s sector. The table below shows some key indicators for the agricultural sector. (All financial figures are in real terms at 2017 prices.)

At the farm level, the industry is smaller in monetary terms and less profitable (although land values are much higher). However, the wider food chain has done an impressive job in boosting food exports and feeding households cheaply. Food self-sufficiency has not changed greatly. For those advocating a completely free-trade approach to food after Brexit, it is interesting that food self-sufficiency was close to 30% in the 1930s – the last time it was tried. The industry is also doing ‘more with less’, in terms of people, land and animals.

Clearly, UK farming is a very different industry to that of the early 1970’s. However, there is also an argument that being part of the Common Agricultural Policy for 40 plus years has held the sector back from what it might have achieved. The next decade or two seems set to unleash even greater change.

There is some trepidation about what the future might hold for farming. One of the ways to reduce uncertainty is to gain the best understanding of the current situation and possible future direction. Andersons are running a series of Seminars at thirteen venues around Great Britain in March, looking at the prospects for UK agriculture in greater detail. This includes the opportunities post-Brexit and the issues the sector needs to tackle, whatever sort of Brexit emerges. For more information please go to www.theandersonscentre.co.uk/Seminars

Ends

No. of words: 444

Author: Richard King

Date: 13th February 2019

This news release has been sent from Andersons, the Farm Business Consultants Ltd, Old Bell House, 2 Nottingham Street, Melton Mowbray, Leicestershire LE13 1NW. For further information please contact Michelle Turnbull on +44 (0) 1362 688761 or +44 (0) 7904 436288.

Enigmatic Russia continues to set records

Guest article by Brendan Dunleavy, Russia and Ukraine expert

At the outset of World War II, Winston Churchill observed that “Russia is an enigma, wrapped in a puzzle, enclosed in a maze. But there is a key: That key is Russia’s national interest.” He could just as easily have been speaking about Russia today, particularly as far as its agricultural and food markets are concerned.

As recently as five years ago, Russia was still importing the vast bulk of the country’s food & agricultural commodity requirements. However, next year (2018), Russia looks set to produce a record grain crop for the fifth year in-a-row. Precisely how Russian farmers can reach this target on a national wheat yield that tends to be in the region of 3 tonnes per hectare, is a puzzle for many.

 

That said, farming in Russia is a very high-risk and unprofita-ble occupation. Climate extremes mean a very short growing season in most regions. Specifically, over most of the country, soil temperatures do not support agricultural seed germination and plant growth until mid-May to early June.

Current reports suggest that the country is again on-track to surpass last year’s record grain harvest. Total wheat area is pro-jected to be 25.2 million hectares with 12 million hectares of this being winter wheat. In autumn 2017, Russian grain crop sowings were estimated projected to produce up to 130 million tonnes from the 2017/2018 crop. That is well above this year’s (2016/17) record harvest of 114.2 million tonnes. Wheat is fore-cast to account for 80Mt of this total, a 10% increase on this year’s harvest (72.5Mt). However, it needs to be emphasised that statistics which estimate Russian grain production have fre-quently been unreliable and there is a cultural tendency to over-estimate.
That said, on the above basis, Russia is expected to have 41.8Mt of grain available to export next year, a new record. This will be well up from the 2017 Russian grain export of 36.2Mt. Feed wheat accounts for almost 77% of total grain exports.

Russian grain exports are boosted by four main factors:

1. low Russian land prices & land rental rates
2. weakness of Russian Rouble
3. low farm management & labour rates
4. low prices & applications of fertilisers & agrochemicals These factors combine to ensure that Russia’s has the lowest costs of producing grains in the world; the current cost of Russian grain production is as low $80 per tonne.

This extraordinarily low cost of production is likely to hold for many years to come. It will also continue to put enormous pressure on American, Cana-dian, British, and other European grain producers, particularly in animal feed markets.

Impact of WTO Trading on NI Beef and Sheep meat

Switch to WTO trading conditions could devastate Northern Irish farming

If the UK fails to agree a post-Brexit trade deal with the EU and has to instead revert to World Trade Organization trading conditions, Northern Ireland beef and sheep meat output could decline by 21%, with exports to the EU collapsing by over 90%. These are the findings of a new 124-page report commissioned by the Livestock and Meat Commission for Northern Ireland (the LMC).

The report, produced by farm business consultancy The Andersons Centre with support from Oxford Economics, gauged the impact on the Northern Irish beef and sheep meat industry of moving from EU to World Trade Organization (WTO) trading conditions under two scenarios: 1) “WTO Equivalence” (where the UK and EU impose reciprocal tariffs on each other’s imports based on the current EU Common External Tariff, as well as an assumption that there would be mutual recognition of veterinary and other technical standards) and 2) a unilateral “Open-Door” trade policy whereby the UK reduces its tariffs on imports from major agricultural producers but without any reciprocal agreements in place. 

The report’s key findings were:

  • If the UK adopted a unilateral Open-Door trade policy, Northern Irish beef and sheep meat output would decline by 21%, as exports to the EU collapsed by over 90%.
  • However, even under WTO Equivalence, whilst output could rise marginally in the short-run (as domestic consumption displaced EU imports) gains would be eroded by declining consumption in the longer-term due to higher prices, and exports to the EU would still fall by over 90%.

The report also found that:

  • Tariffs for meat sales are substantial, ranging from 40% to around 100%.
  • Non-Tariff Barriers (NTBs) are estimated to amount to a 3% tariff equivalent under WTO Equivalence and 5.7% under an Open-Door trade policy. These estimates are based on a thorough examination of NTBs and their impact on the red meat sector rather than relying on generic estimates, which is a drawback with previous studies on this issue.
  • Farm profits decline in both scenarios particularly when combined with reductions in farm subsidies.

The report concludes that if an Open-Door trade policy was adopted, the viability of beef and sheep farming across large swathes of Northern Ireland would be seriously threatened, with grave consequences for the wider Northern Irish rural economy.

The report makes six recommendations for policy-makers:

  1. Agree interim Single Market (EEA) and Customs Union membership for at least 5 years post-Brexit to negotiate the finer details of the eventual deal and develop the required infrastructure, with a mid-way review to examine whether enough progress has been made (e.g. technology to facilitate frictionless cross-border trade)to affect timeframes.
  2. Set up an Agri-food Workers’ Scheme to permit continued access to labour for Northern Ireland processors, coupled with incentives for locally-based staff.
  3. Bolster efforts to get Northern Irish products approved for sale in non-EU countries, including gaining mutual recognition of veterinary standards.
  4. Formulate a long-term strategy for food and farming.
  5. Ensure that food imports meet the same rigorous standards as domestic produce.
  6. Adopt EU Official Controls of animals and meat products at slaughter houses, meat plants and collection centres for live cattle within the UK and Republic of Ireland to permit frictionless cross-border trade.

If WTO trading did come to pass, the report suggests several further recommendations, including as a last resort considering a “Cyprus-type model” for cross border trade if no other agreement is possible.  This is because the island of Cyprus is within the EU, but only the southern half is recognised as within the Single Market.  Consequently, there are special rules regarding the trade of goods between the southern half and the Turkish Republic of Northern Cyprus. However, the report also notes that whilst a Cyprus-type model could help to facilitate trade reasonably close to existing levels, potential obstacles remain.

The report’s other recommendations in the event of WTO trading coming to pass include setting bilateral Tariff Rate Quotas to mirror historic trade flows between the UK, EU-27 and non-EU countries, as well as Northern Irish beef and sheep meat exporters capturing more of the domestic UK market and opening-up new markets.

Michael Haverty, lead author of the study, said: “An Open-Door trade policy would have a devastating impact on the industry both domestically and internationally. Whilst a Cyprus-type model highlights the need for contingency planning, the ideal outcome remains avoiding WTO trading conditions by agreeing interim Single Market and Customs Union membership for 5 years post-Brexit, incorporating a mid-way review, to negotiate and implement a more considered long-term agreement.”

The report is available via:

https://theandersonscentre.co.uk/wp-content/uploads/2019/06/LMC-Final-Report_31_Aug_17.pdf

10-year license renewal for glyphosate?

The EU Commission stated that it will propose extending its approval for glyphosate by 10 years, having taken into account the recent ECHA study’s view that glyphosate should not be classified as a cancer-causing substance.

The Commission decision has drawn criticism from both environmental groups and crop protection companies which were seeking a longer approval. No date has been set for when discussions with Member States will start. It also remains to be seen how the new French government will react to the proposal as green activist, Nicolas Hulot, has been appointed as environment minister. From a UK standpoint, although EU decisions will become less important from March 2019 onwards, any decisions taken before that date will be transposed into UK law via the Great Repeal Bill. Therefore, the renewal agreed at EU level will also be applicable to the UK, assuming a decision is made before 2019 of course…

RICS/RAU Rural Land Market Survey

The latest survey results covering H2 2016 indicate a further softening in farmland demand, a trend which started to emerge in the latter half of 2015. The RICS/RAU report also suggests that anecdotal evidence from survey respondents highlight Brexit and future farm support uncertainties as well as declining agricultural profitability due to poor commodity prices as key headwinds.

The report also forecasts a further price declines over the next twelve months although it notes that respondents’ sentiments are less negative than the last survey, conducted at the time of the referendum.

The survey uses a combination of transaction based measure of farmland prices (which includes a residential component where its value is estimated to be less than 50% of the total) and an opinion-based measure (a hypothetical estimate by surveyors of bare land prices). The transaction-based measure suggests an average price of £10,233 per acre which is 7% lower than a year ago. The opinion-based measure, although 3% lower than last year, was broadly flat in comparison with H1.

RICS/RAU Rural Land Market Survey H2 2016 – Key Results

(£ per acre unless specified) H2-2015 H1-2016 H2-2016 (p) % change
Farmland: transaction based1
Weighted average price 11,049 10,952 10,233 -7%
Bare land: opinion based
Weighted price 8,306 7,975 8,062 -3%
Arable 9,304 8,911 8,982 -3%
Pasture 7,308 7,040 7,143 -2%
Rents: weighted average per acre
Arable – AHA 86 79 78 75 -5%
Arable – ATA 95 (FBT) 151 142 135 -11%
Pasture – AHA 86 56 60 53 -5%
Pasture – ATA 95 (FBT) 103 96 94 -9%
Yields (%) 1.8 1.6 1.5 -17%

(p) provisional subject to revision; includes residential component (less than 50% of value) Source: RICS/RAU

The report also estimates that average arable FBT rents are 11% lower than a year ago whilst pasture rents are down by 9% on a year-on-year basis. AHA rents have also declined although as one might expect this is not as pronounced given they are set at a lower level to reflect their longer term duration.

Average land prices since 2003 (£ per acre)

Source: RICS/RAU

Yields on investment land are also lower. During H2-2016, it is estimated that 63% of buyers were individual farmers whilst lifestyle buyers accounted for just under 25%.

In Ireland, the Irish Farmers’ Journal Land Price Report estimates that average land values decreased by 1.6% on 2015, a second consecutive fall. The average value of Irish farmland is estimated at €8,771 per acre (£7,455).

Looking ahead, with UK farm profitability and incomes picking up and Sterling likely to remain weak in the foreseeable future, it is possible that farmland prices could stabilise and possibly even rise during 2017/18, especially given the low interest rates and potential effect of inflation which has driven land prices upwards in the past. Longer term, Brexit remains the big unknown and the period of relatively robust land prices over the last 15 years could end if the exit terms and future farm support are unfavourable. Brexit will also become more of an issue for rents, particularly FBTs as 2019 draws closer. It is likely that ‘Brexit clauses’ or clauses to review rental values in the light of a significant change in support for example will become a more common feature of rental agreements.

Precision farming

Last month, Defra published statistics on the utilisation of precision farming techniques (i.e. soil mapping and use of satellite technology to guide fertiliser application) by farm businesses in England.

The results show that usage on cereal and general cropping farms have increased steadily with uptake by farm businesses estimated at 44% and 50% respectively. Uptake is less prevalent in dairy and mixed farms where uptake is gauged at 20% or less. Defra noted that usage was more common on very large farms. It also tends to be greater for higher economically performing farms, although after allowing for other factors such as farm type and size, the difference between performance groups is not significant.

Defra also estimated that the usage of soil nutrient software packages (soil mapping) for fertiliser applications stands at 23% across all farms, uptake is substantially higher amongst cereals farms (43%) and general cropping farms (60%).

Uptake of precision farming techniques by farm type, England, 2012/13 to 2015/16

Source: Defra

The fact that precision farming techniques are becoming increasingly common is no surprise. Much of the new machinery coming on to the market (e.g. tractors, combines etc.) now comes with these technologies installed as standard. Recent research for The Andersons Centre concurs with the Defra findings and shows the uptake of auto-steering has grown strongly since 2012, although the uptake of variable rate application and telematics lags. There is little doubt that some precision farming techniques are becoming mainstream. The trickier question is whether all precision techniques are worthwhile. By its very nature, precision farming will vary from farm-to-farm and it is seen by many of the larger farms especially as an effective means to manage scale and capture key information, such as historic applications, land capability etc., thus assisting farm managers to conduct operations more effectively. It is also essential that the fundamentals of good farming practices remain paramount as it is easy to become engulfed by a torrent of data which can waste precious time and cloud decision-making.

Uptake of specific precision farming technologies in UK farming

Technology

2012*

2016

Approximate cost

GPS (incl auto-steering)

22%

~55%

up to £10K

Soil mapping

20%

~25%

£15 – £30 per ha

Variable rate application

16%

~20%

built into equipment

Yield mapping

11%

~20%

£5 – £7 per ha

Telematics

2%

~5%

circa £1k + yearly cost

*Defra 2012 estimate – Source: Defra

Fertiliser prices – selected products

On-Farm Fertiliser Prices – w/c 19th June 2017

Fertiliser Type (all prices in £/tonne)

This month

Straights and Others

34.5% N (UK)

175

Urea – 46%N

190

Ammonium Sulphate and Ammonium Nitrate (granular)
(27%N:30%Sulphur)

200

Triple Superphosphate (46%P)

264

Muriate of Potash (60%K)

233

Source: InsideTrack

Prices are based on delivery during September/October 2017

Spray prices – selected products

On-Farm Spray Prices – w/c 19th June 2017

Active Ingredient (AI)

Example Brand(s)

Pack Size

(L; KG)

Price (£/pack)

Price (£/L)

Cereals – General Herbicides

Diflufenican

Hurricane

1

27

26.75

Flufenacet + diflufenican

Liberator

5

247

49.47

Flufenacet + Pendimethalin

Crystal

10

119

11.85

Flupyrsulfuron-methyl and thifensulfuron-methyl

Lexus Millennium

0.2

101

504.80

MCPA

10

40

3.97

Mesosulfuron iodosulfuron

Atlantis; Pacifica

2

174

86.77

Pinoxaden + Cloquintocet-mexyl

Axial

5

403

80.60

Source: InsideTrack

Spray prices refer to on-farm spot trade (ex. VAT) quoted across the Midlands, East Anglia and South East of England and do not include additional service costs (e.g. field walking etc.). Example brands are given for reference purposes only, alternative brands also available.

Brexit Bills in Queen’s Speech

On 21st June, the Queen launched the Government’s programme, devoid of its most controversial manifesto commitments, which included eight Brexit Bills on:

  • Agriculture – to replace the CAP
  • The Repeal – of the European Communities Act 1972 and copy and paste the contents into UK law
  • Customs – to replace EU customs rules and allow the UK to impose its own tariffs (significant for agricultural exports and imports)
  • Trade – to operate our own trade policy (this may face opposition from soft Brexit MPs wanting to keep the UK in the EU customs union)
  • Immigration – to allow the UK to set its own immigration policy (vitally important for the fruit & veg, poultry and processing sectors).
  • Fisheries – to take control of UK fishing waters and to set fishing quotas.
  • Nuclear safeguards – to set up a nuclear safety regime (currently regulated by Euratom)
  • International sanctions – to allow the UK to apply its own international sanctions

Of particular interest to InsideTrack readers is the Agriculture Bill.  This is the first chance for a British Government to design a wide-ranging reform of agriculture policy since 1947 (the last substantive Agriculture Act).  It presents a once in a generation opportunity to shape and sustain a profitable farming sector without (we assume) CAP levels of direct support and EU border protection arrangements.

The Government’s says that:

“The Bill will ensure that after we leave the EU we have an effective system in place to support UK farmers and protect our natural environment. The Bill will:

  • provide stability to farmers as we leave the EU;
  • protect our precious natural environment for future generations;

We will see.

Sugar beet – yield, prices and prospects

The dry weather has meant germination has been patchy in many spring crops, and sugar beet is no exception. Some crops have been re-planted, but the number of these is very small. Most growers have been hoping that some rain (which has now arrived) will be enough to recover the situation.

Whilst many beet crops are undoubtedly behind where they might normally be, there is still enough of the growing season left that overall yields will not necessarily be affected.  The final 2016 crop yield was 71.4 adjusted tonnes per Ha.

The contracted area for the 2017 has grown significantly.  After two years in 2015 and 2016 where the total area was down to 80,000 hectares, this year’s plantings are up to 105,000 hectares.  British Sugar has offered extra Contract Tonnage Entitlement (CTE) as its own stocks have reduced whilst EU and world markets have improved.

On the subject of markets, the EU sugar price was around €495 per tonne up to March this year (EU price reporting is a little slow).  This is above the €475 per tonne threshold level for bonuses to be paid under the new 2017 pricing mechanism.  However, since the start of the year world sugar markets has declined and this may soon start to impact the EU price.  The reference period for the calculation does not begin to operate until October this year, so none of the current market movements are actually affecting the price that growers will receive.