Impact of a No-Deal Brexit on Farm Profitability

With the UK due to leave the EU on 31st October and the possibility of a No-Deal Brexit becoming more likely, The Andersons Centre (Andersons) recently conducted research on behalf of the BBC to assess its potential impact on the profitability of UK farming, 9-12 months after Brexit taking place.

To undertake this analysis, Total Income from Farming (or TIFF) is a useful measure to look at the farming industry as a whole. It is an aggregate, so hides differences between sectors and individual businesses, but provides a simple measure of the profit of ‘UK Agriculture Plc’. In technical terms, TIFF shows the aggregated return to all the farmers in UK agriculture and horticulture for their management, labour and their own capital in their businesses. To allow for yearly variations in weather conditions and exchange rates for example, a three-year average (2016 to 2018) was used as the basis for comparison.

Taking into account previous studies, some of which have been undertaken by Andersons, a top-level assessment of the impact of both a Brexit Deal and a No-Deal on the output of each farming sector was compiled in addition to an estimation of the effects of both Brexit scenarios on key costs which are incurred by UK farming. This assessment considered the potential impact of tariffs (including the UK’s March 2019 announcement on its No-Deal Brexit tariff schedule), non-tariff barriers and tariff rate quotas. Importantly, it was assumed that support levels to UK farming were kept constant as the UK Government has committed to farming receiving current levels of support until the end of this parliament (scheduled to be 2022).

Under a Brexit Deal scenario, a small decline in profitability (3%) is projected; however, under a No-Deal, an 18% decline is forecast.

Impact of Brexit on UK Farm Profitability under a Deal and No-Deal Scenario

Sources: The Andersons Centre and Defra

Like all top-level industry averages, there is significant variation within the overall estimate. For instance, where output is concerned, substantial declines are forecast for sheepmeat (-31%), whilst output for cereals, milk and beef production are also down. Some increases are projected for horticulture and intensive livestock (pigs and poultry) provided there is sufficient labour available for undertaking operations.

With respect to costs, some decreases are forecast for inputs which would be affected by the introduction of lower UK import tariffs under a No-Deal scenario. Examples here include animal feed, fertiliser and plant protection products. However, other inputs such as veterinary costs are projected to rise as it is anticipated that there would be a significant increase in demand for veterinary staff to assist with border inspection operations.

An 18% decline in profitability would equate to a hit to UK farming generally of almost £850 million. With many farms already struggling to break-even, the projected hit on profitability in some cases likely to significantly surpass the industry average, the viability of many farming businesses will be in jeopardy. Unsurprisingly, grazing livestock farms (particularly sheep) would be the most exposed given the output declines mentioned above, but a No-Deal would also result in a significant downturn for dairy farming in Northern Ireland, given its reliance on having its milk processed in the Republic of Ireland.

For further information on how a No-Deal Brexit could affect farming and to address the trade-related risks arising, Andersons is running a webinar on Thursday, 12th September to provide further information on how businesses can prepare. Further information is available via:

https://attendee.gototraining.com/r/1384475755831393282

Impact of Trade Barriers on UK Beef and Sheepmeat

Beef and sheepmeat trade with the EU could plummet by over 90% under a ‘No Deal’ Brexit.  This is one of the headline findings of a study recently published by the AHDB in collaboration with QMS and HCC.  The report, complied by The Andersons Centre, looks at the impact of trade barriers on the UK beef and sheepmeat sector post-Brexit.  It examined two scenarios; a Brexit Deal and a No Deal Brexit.  Some of the main points include;

  • Trade impact under a Brexit Deal scenario is relatively small:  total exports would decline by about 1% in volume terms (imports 0.8% lower), driven by EU27 declines.  Sheepmeat exports to EU27 are forecast to decline by 1.5% whilst corresponding imports would be 3% lower. These declines are chiefly due to Non-Tariffs Measures (NTMs) – i.e. the increased trade ‘friction once the UK was not part of the Single Market.  There would be minimal changes to non-EU trade.
  • Significant upheaval under No Deal: trade with the EU27 would plummet (by 92.5%) due to the imposition of tariffs, TRQs and higher impact of NTMs.  Sheepmeat trade with the EU would be almost completely wiped out.  Substantial declines in trade with the EU27 would also ensue for beef – exports down by 87%, imports declining by 92%.  Somewhat better market access for beef compared to sheep, due to TRQs, would permit some UK-EU trade to continue.  The introduction of a new 230Kt TRQ for UK beef imports would cause non-EU imports to soar by over 1,300%.  This would lower prices and drive-up UK consumption by approximately 7%.  Sheepmeat imports from non-EU countries are not anticipated to change whilst consumption is projected to rise by 14% due to declining prices.
  • Price impacts: there would be small declines under a Brexit Deal scenario (-1 to -3% respectively).  Under No Deal severe price declines would be seen.  Sheepmeat is particularly exposed (projected 24% price fall under No Deal).  Downward price pressure for beef (-4%) under No Deal arises due to competition from lower priced world-market imports.  This would be exacerbated if significant volumes of Irish beef enter the UK barrier-free via NI.
  • Value of carcase meat output: under a Brexit Deal, output would decline by an estimated 1.7% whilst under a No Deal the decline would increase by nearly ten-fold (-11.7%) with sheepmeat output nearly 31% lower which would be devastating for incomes in the sector.  Growth in exports to non-EU markets under No Deal would be insufficient to compensate for the loss of access to the EU27.

Projected Impact of Trade Barriers on Domestically-Produced Beef and Sheepmeat (Farm-Gate Level)

Sources: Defra (2019) and The Andersons Centre (2019) *Baseline Figures derived from Defra data.

  • Similar Impacts at Farm Level:  Andersons’ Meadow Farm model projects a 27% decline in profitability (£68 per Ha versus the current £93 per Ha) under a Brexit Deal, but the farm would still be profitable provided it can maintain its current support levels.  Even with support unchanged, Meadow Farm starts to generate unsustainable losses under No Deal with a projected deficit of £45 per Ha, equating to a £7,000 loss.
  • Domestic Market Opportunities: could arise for domestic producers if trade barriers reduce the competitiveness of imports.  However, the proposed access granted under additional TRQs in the beef sector would diminish this.  There are also fears that future changes to standards might make imports more competitive, thus limiting domestic market opportunities even further.
  • Frictionless trade with the EU27 as a third country is not currently possible: and looks set to remain so for at least a decade as the required technology has not yet been developed, let alone tested.  Long-term, technology can contribute to reducing this via e-certification systems, but friction cannot be reduced completely.  Post-Brexit increases in trade friction are inevitable.
  • Most significant non-tariff measures relate to value deterioration: value deterioration (especially fresh meat) arising from border-related delays associated with physical checks and sampling (associated with sanitary and phytosanitary (SPS) regulations) is of most concern to industry and is the biggest contributor to non-tariff costs generally.  Its impact on frozen products is much lower but still a factor in terms of potential penalties imposed on delayed consignments.
  • Uncertainty about future border arrangements:  under No Deal centres particularly on trade on the island of Ireland which the UK Government has claimed would remain frictionless.  If there are also no checks on NI-GB trade, whilst any exports routed from Dublin to Holyhead would be subject to tariffs and regulatory checks, the potential for re-routing meat from the Republic of Ireland via NI and onwards to GB without any checks, could result in substantial volumes of Irish beef being placed on the UK market (beyond the 230Kt TRQ) by the ‘backdoor’.  If significant volumes enter the UK in this fashion, substantial price declines for UK beef farmers would ensue.
  • Disproportionate impact on Small and Medium-Sized Enterprises (SMEs): arising from higher operating costs, fewer loads dispatched and a lower propensity to avail of special authorisations such as AEO status (which confers a lower risk on operators from a regulatory authority perspective).
  • Inflationary pressures: particularly for farm-level imported inputs from the EU27 (e.g. fertiliser, medicines etc.) but also elsewhere.  These costs are unlikely to be absorbed by the supply trade and would be passed on to consumers and/or to primary producers (i.e. farmers).  Any meat price rises are likely to cause consumers to increase their propensity to substitute with cheaper sources of protein, thereby making it more likely that beef and sheep farmers would beat the brunt of price pressures.

The study concluded that a Brexit Deal based on a comprehensive FTA and close customs and regulatory arrangements with the EU would be far preferable to a No Deal Brexit, which could have a devastating impact, especially for sheepmeat.  Whilst developing overseas markets will be crucial to the long-term success of British beef and sheepmeat, close attention must be paid to protecting existing markets, specifically the domestic UK market and the EU27 export market.  The study also found that even if the UK had never entered the EU (or EEC) in the first place, it is highly likely that markets such as France would still be vital to the British sheepmeat industry due to proximity.  To minimise any upheaval post-Brexit, the report states that having a comprehensive mutual recognition agreement between the UK and the EU is crucial.

The report’s findings were similar to several previous studies; however, this study goes into significantly more detail on how non-tariff measures could affect the sector.  It also provides useful insights on the implications of a No Deal Brexit for carcase balance in the sheepmeat sector where it estimates that up to 22% of the annual UK lamb kill (3.1 million head) could be affected.  This would be a major challenge to a sector where approximately one-third of the lamb crop is exported each year.  If it wasn’t already clear, this report underscores the importance of a good Brexit Deal for the grazing livestock sector.  The report is available via: https://ahdb.org.uk/knowledge-library/red-meat-route-to-market-project-report 

 

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/.

Brexit Reaching Tipping Point

On 15th January, the Government suffered a historic defeat (by 230 votes) in its first bid to get Parliament to accept the Withdrawal Agreement and accompanying Political Declaration.  As a result, the sense of chaos and uncertainty in Westminster has accelerated. Whilst it is clear that the Parliament does not want this deal (in its current form), what is not clear is what sort of deal there would be a majority for.  The EU is clear that the ball is now in the UK’s court and the Prime Minister, assuming she wins today’s confidence vote, needs to set-out a plan by Monday.  Following last month’s article, below is an update of the potential options available in the coming weeks and months.  It is likely that a combination of these will be required.

  • Cross-party dialogue: this is the most obvious first-step that the Government needs to take and the noises from Downing St. suggest that it has already started to do this.  However, such an approach does not have much chance of succeeding if additional options to the PM’s deal are not considered.
  • Indicative votes: have been suggested by several MPs as a means to break the deadlock as the votes would be non-binding. It would help to gauge what there could be a majority for in the House of Commons.  The scale of the Government’s defeat on the Withdrawal Deal shows that another vote on the current deal has no chance of succeeding unless it can be changed fundamentally.
  • Renegotiate with the EU: on numerous occasions during the Brexit process Westminster has been operating in a silo and has not sufficiently considered the EU’s perspective in the negotiations.  Whilst some form of Brexit might eventually emerge as a favoured arrangement within the House of Commons, it has no chance of succeeding without agreement by the EU.  What is clear is that the EU will not back-down on the backstop and the UK Government’s strategy of trying to isolate Ireland has back-fired at every juncture.  It is therefore clear that if the UK wants to dilute the backstop, which is detested by many in Westminster, a lighter form of Brexit will be required. Below are some of the possibilities available;
    • Norway Plus / Common Market 2.0 – both of these options are broadly similar and essentially amount to the UK being within the European Economic Area (EEA) similar to Norway.  But, in addition, the arrangement would include agricultural products and the UK being part of a Customs Union.  As mentioned previously, this option has gained traction but the big drawback is that Freedom of Movement would have to be accepted, and as this was a major reason for the Leave vote in the first place.  It is unlikely to be favoured by many in the Labour party. Added to this, the UK would not have voting rights, would probably have to pay into the EU budget, and could not strike its own trade deals.  Therefore, it continues to be very difficult to see this arrangement being successful without some form of emergency brake on immigration as a minimum, even then it presents grave difficulties. 
    • Customs Union with the EU: this is  the favoured option by the Labour party as it would go some way towards addressing the Northern Ireland border but would potentially curtail free movement.  However, on its own, it would not prevent border checks on the island of Ireland as sanitary and phytosanitary (SPS) checks would still be required.  Unless the UK could agree some form of regulatory equivalence agreement with the EU, of the kind that has never been reached before, then Brussels will continue to insist on a backstop. It would also mean an independent UK trade policy for goods would be largely redundant.
    • Free-Trade Agreement with the EU: an accord similar to the CETA agreement with Canada is championed by many Brexiteers as the panacea to the current impasse and they claim that it will also address the Irish border problem.  A cursory assessment of the EU’s Official Controls Regulations (2017/625) would show that this is simply not the case, as SPS border controls would still be required on the island of Ireland.  Such controls would of course be unacceptable to the DUP and the famed technological solutions are years away (and some doubt whether they are feasible at all). 
  • Second Referendum: this is still the favoured option amongst many Remain MPs, however, as with all other options, there is not a majority in Parliament for this and the Labour leadership is lukewarm to say the least.  Even if a majority of MPs decided on a second Referendum, the path ahead would be fraught with difficulties.  Firstly, what question(s) would need to appear on the ballot box to reflect the now diverse range of opinions in the UK (from No Deal to No Brexit).  Secondly, it could lead to social instability as there would be heated opposition in some quarters and would at least entail another six months of uncertainty.  Some would argue that another Referendum, if framed correctly, could at least lead to a definitive answer (e.g. if Leave won, then the issue is dead for a generation).  However, all indications suggest that it would be another close vote, and if anything has been learned in the last few years is that the British public do not want more of the same, no matter what the outcome is.
  • No Deal: continues to be the default option and with 72 days until Brexit, its likelihood increases by the day, particularly if the House of Commons does not pass a cast-iron guarantee that No Deal will not happen. As outlined in previous issues, a No Deal has the potential to severely damage UK farming, especially as it may well eventually encompass a liberal trade policy with respect to imports.  On 16th January, the NFU has emphasised its view that a No Deal would be catastrophic for UK farming and most business associations agree with this view.  From an Irish perspective, a No Deal also presents a major dilemma.  If it does not introduce some forms of regulatory checks on produce coming in from the UK (including from Northern Ireland) in the event of a No Deal, then this may be viewed unfavourably by customers elsewhere in the EU and non-EU, who may in-turn place some additional controls on Irish produce. Such a development would have damaging ramifications for the Irish economy, whilst the re-introduction of a hard border would have severe social consequences. In such a situation, it is therefore likely that the Irish Government would first seek to introduce temporary measures along the border (citing safety concerns), similar to what was done during the foot-and-mouth crisis in 2001.  It could potentially keep these for weeks if not months in the hope that a more sustainable Brexit outcome could be achieved.  However, even such a temporary move is also likely to entail problems.
  • Extension to Article 50: all of the options set-out above contain unpalatable elements.  With the time relentlessly ticking towards the 29th of March and numerous Bills and secondary legislation still required to be passed by the Commons, the prospect of an extension to Article 50 grows by the day.  Rumours circulating in Brussels suggest that preparations are being made for a formal request by the UK for an extension and while a period of 3-months is doable (i.e. till early July) a longer period would present legal problems for the European Parliament if the UK is still a Member State and has no MEPs. Therefore, if an extension is to be accepted by the EU and its Member States, it will need to be coupled with a clear plan from the UK as to what form of Brexit or plan of action it could agree on which could be countenanced by the EU.

Overall, it now appears that an extension to Article 50 will be required and another attempt will be made by the Government to get some form of Withdrawal Agreement passed by the Commons.  It would appear prudent to do this after indicative voting to discern what sort of a deal would garner a majority, bearing in mind what would also be acceptable to the EU.  If the Government fails at the second attempt to pass a deal, much will then depend on Labour.  If it attempts another confidence motion and loses, will it call for a second Referendum?

Many questions remain. All the while, agri-food businesses have to try and cope with all of the uncertainty which does not show signs of dissipating just yet.

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/.

The hidden danger in food and feed: The Andersons Centre in cooperation with the HFFA Research GmbH published a report on mycotoxins

The report highlights that it is crucial to put in place science-based measures and policies to decrease one important and emerging danger in food and feed: mycotoxins. These are toxins produced by fungi infesting plants and they pose a danger to human and animal health. In recent years, mycotoxins have consistently been one of the top three causes of food and feed safety alerts in the European Union. However, contrary to expert knowledge public perception is different: As mycotoxins are natural food contaminants, they are not considered a real danger. Graham Redman (The Andersons Centre) and Steffen Noleppa (HFFA Research GmbH) underline that mycotoxins are likely to become a greater issue for food and feed safety in the future as forecasts suggest that climate change and other drivers will further contribute towards the risk of mycotoxin build-up in, for instance, maize and wheat.

Thus, mycotoxins have and will have significant impacts on farmers’ management practices and profitability. Furthermore, they incur costs for the overall society as the toxins can deteriorate agricultural productivity and food quality and may cause severe health problems.

Download: Mycotoxin Report

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

Market profile: Japan – export opportunities

Last month’s edition reported on UK cereals and oilseeds exports to EU and non-EU countries for 2015/16. This month, we are examining the Japanese market in further detail to identify potential opportunities for UK exporters.

Japan Market Overview

Population (2016)

127.3 million

GDP per capita (2016)

$38,401

Estimated wheat imports (2016)

5.4 Mt

Estimated barley imports (2016)

1.1 Mt

Wheat consumption per capita (2016)

42.8 kg per annum

Sources: OECD, Global Trade Atlas, USDA

As the chart below illustrates, aside from rice, Japan is heavily dependent on cereals and oilseeds imports. For maize, the USDA estimates that roughly 75% of imports are used for feed and the remaining 25% is primarily used for corn starch processing.

Japan Food Balance Sheet – Selected Commodities – 2015

Source: Japanese Ministry of Agriculture, Food and Forestry (MAFF)

More importantly from a UK perspective, Japan imports significant quantities of wheat and barley. Latest Japanese Ministry of Agriculture, Food and Forestry (MAFF) data suggest that domestic wheat production is rising, but imports still account for over 90% of domestic consumption (circa 6.6 Mt) which is primarily used for human consumption. Food quality wheat is mainly imported from the US, Canada and Australia for a variety of uses including noodles, bread-making, confectionary and pasta production. MAFF controls both producer and resale prices of domestic wheat, as well as the resale price of imported wheat. Imported wheat purchased by MAFF, at international prices, is sold to domestic flour millers at a mark-up.

In terms of the UK, the AHDB estimates that wheat exports to Japan totalled 91,912 tonnes in 2015/16, more than doubling from 42,500 tonnes during 2014/15. Exports include both food quality and feed wheat with the latter estimated by the USDA to be around 34,300 tonnes during 2014/15.

Whilst the USDA estimated aggregate barley consumption (food and feed) to be in the region of 1.3 Mt in 2014/15, MAFF estimates suggest that Japanese barley consumption is closer to 1.9 Mt with industrial use representing nearly 60% of usage.  With cattle populations decreasing, Japanese feed barley usage is down. Due to a 2015 trade deal, Australia is the main source of Japanese barley imports. AHDB estimates put UK barley exports to Japan at 36,880 tonnes in 2015/16 and around 73,350 tonnes of unroasted malt was also exported during this period.

These findings show that the UK already exports significant volumes of grain to Japan. With Japanese whisky becoming increasingly prominent in recent years, there may be opportunities for the UK to further increase exports, particularly given the weaker Sterling. It is also worth noting that there is demand in the Japanese food industry for barley with high levels of beta-glucan, because of its perceived health benefits. In the UK, high beta-glucan content is seen as being disadvantageous for malting and feed markets. Such perceptions may change if opportunities in premium markets such as Japan start to emerge.

Japanese Yen to Sterling Exchange Rate – 2014-2017

Source: Bank of England

Although some had hoped for the EU to conclude a trade deal with Japan by the end of 2016, the chances of this happening now appear remote. Therefore, the UK is unlikely to experience any benefits from a Japanese trade deal for the remainder of its EU membership. The extent to which the UK will be able to agree a free trade deal with Japan post-Brexit is questionable. Firstly, as the Japanese Chief Cabinet Secretary Yoshihide Suga suggested in January, the Japanese government is likely to “watch for a while” to see what effect Brexit and any associated transition is likely to have on the world economy and on Japanese firms before conducting any extensive trade negotiations.

Hogan uncompromising on EU standards

The need to develop agri-food exports in non-EU markets is more important than ever for EU farmers to help to mitigate the risk posed by Brexit. That was the view expressed by Commissioner Phil Hogan at a recent global trade conference in Dublin.

Unsurprisingly, little was given away on what the EU’s negotiating strategy on Brexit might be as Article 50 has not yet been triggered. He did claim that an agreement on the terms of exit would need to be concluded before an agreement on the future trading relationship would be finalised. However, this does not preclude exit negotiations and trade negotiations proceeding in a broadly parallel fashion as indicated previously by Michel Barnier, the EU Commission’s lead Brexit negotiator.

Commissioner Hogan did pose the question whether British farmers and food standards would become “sacrificial lambs” on the altar of free trade for a global Britain? He was clear that the EU will not compromise its food standards in the pursuit of trade deals although there was also an acknowledgement that any potential trade deal between the EU and Mercosur would require careful management.

What appears implicit in Commissioner Hogan’s views is that if the UK wants a deal with the EU on agriculture, existing (EU) standards would need to be adhered to. If the UK pursues free trade deals with the US for example and permits hormone treated beef to be sold in Britain, could this mean that more rigorous checks are imposed for UK-EU agricultural trade?

UK bioenergy 2015 crop usage down

A Defra study (published 8th December) estimates that 93,000 ha of UK agricultural land was used for bioenergy, equating to 1.6% of arable land.

This is a 23% decrease on the previous year (122,000 ha) due mainly to reductions in wheat, barley and OSR used in biofuels. Road transport fuel usage (i.e. bioethanol and biodiesel) (49,900 ha) accounted for 53% of the 2015 area. However, it is noteworthy that the majority (70%) of crop derived biofuels for road transport originates from outside the UK, with France being the leading contributor.