Wednesday, 6 April 2016

Agricultural study illustrates why leaving the EU is full of uncertainties and too much of a gamble for farming and rural communities

The complexity of the political and economic reality cannot be captured in full - there are many elements that cannot be factored in the study, like the impact of Brexit on the availability of foreign labour, the price of UK land or on the £/€ exchange rate.

Despite these uncertainties, the NFU is confident that the scenarios presented offer a good representation of the spectrum of policy options a UK government might consider in the event of leaving the EU.

Last year the NFU presented a report examining the UK’s current relationship with the EU and it highlighted that while some of the positives and negatives of EU membership for British agriculture are known, there is no clarity on what a vote to leave the EU would mean. In particular, what trading arrangements would we have outside the EU and what would a British agricultural policy look like?

So the NFU commissioned a world leading agricultural research institute from the Netherlands, the LEI Wageningen UR, to assess the possible effects of a number of different trade and agricultural support policies which would, in theory, be open to the UK government in the event of a Brexit.

The findings in respect of those scenarios are presented in a summary report and can be read in full on the NFU’s website. It has also been widely commented on in the media and I include links from Farming UK and the Guardian as examples.

The study gives an indication of what may happen based on three scenario whilst accepting that there are limitations to what can be quantified. For example:-

doesn’t consider what the impact would be if the UK government decided to cut the level of regulation faced by our industry;
what would happen to the demand for British produce if some food manufacturers decided to relocate somewhere else in the EU in order to remain in the single market.

The report indicates that some of the scenarios appear to suggest that there could be serious risks to farm income from leaving the EU, while others suggest there could be a more favourable outcome. 

It comes down to a matter of judgement as to which of the scenarios appears the most likely.
This in turn will depend on the policy position adopted by the UK government when outside the EU.

In the past successive British governments have been strong advocates of open and free trade. It has called for tariff protection across all farm sectors to be reduced and it has called for the abolition of direct support payments made through the CAP. While a member of the EU, the UK has not been able to realise those goals fully, nevertheless it has taken direct action to reduce the level of farm payments available to farmers.

An important point made is that:

As yet, those who are advocating for us to leave the EU have not made it clear whether these policies would change in the event of a Brexit.

This study provides an insight into the potential effects of two key issues for farm businesses after the UK has left the EU:

UK’s international trading relationship (and its impact on the domestic market) and
the level of domestic support for farmers.

Two of the three trade scenarios modelled, namely the Free Trade Agreement between the EU and UK (FTA) and the World Trade Organisation (WTO) both have a kind of anti-trade bias. In other words, British agricultural policy would in effect become more protectionist than it has been under the present CAP.

Under both trade scenarios, UK farm gate prices are expected to increase. This is mainly because imports would become more expensive, driven by trade facilitation costs, loss of benefits from cheaper imports under the EU’s preferential trade arrangements and in the case of the WTO default scenario, higher tariffs with the EU. Higher prices would stimulate domestic production, but on the other hand they would reduce domestic use. The net result of this would be an improvement in the UK’s trade balance mainly due to declining imports.

The questions to be asked about these two scenarios are political rather than economic. A more protectionist policy would be a reverse of the policies that successive British governments have pursued for the last 40 years; it would go against a world-wide trend to more open agricultural trade and would be in contradiction to the stated aims of many of those who advocate that the UK should leave the EU.

The UK Trade Liberalisation scenario would appear to be more in line with the established British government policy and with the views of many of those who advocate leaving the EU. This scenario has a significant negative impact on farm gate prices for a number of products, but mainly for meat and some dairy products. The result would be less meat and milk production, decreasing the UK’s self-sufficiency levels in those products, and creating a knock-on effect on demand for feed. Lower tariffs would offset the higher trade facilitation costs faced by importers and could therefore be appealing to the government. 

The results of each scenario show that the biggest driver of UK farm income change is the level of public support payments available. The positive price impacts on farm incomes seen through both the FTA and WTO default scenarios would be offset by reductions in direct support.

 A reduction of direct support, or a complete elimination of it, would exacerbate the negative impact effects seen under the UK Trade Liberalisation scenario. The cattle and sheep sectors are particularly dependent on direct support payments, but so too are mixed farms and field crops. Consequently, the combination of a more liberal trade policy and a reduction or elimination of direct support would make many British farms less viable.

My verdict:
As I have posted several times before the prospect of leaving the EU is far too much of a gamble to take, it is full of uncertainties and crucially those who advocate leaving the EU have provided no information or clear commitments whatsoever on alternative policies to the CAP, international trade and farming regulation.

The risks involved in losing access to European markets is too great, the Common Agricultural Policy  is critical to Welsh agriculture, especially in the current commodity price crisis and the EU Rural Development Programme helps Welsh farming improve its competitiveness and profitability.

This post is based on the introductory remarks of Meurig Raymond, President NFU England and Wales and the concluding comments in the report.