Analysis: AHDB Brexit report under the spotlight

Life for farmers after Brexit will likely be about survival of the fittest.

That, at least, is one implication to be drawn from a new impact assessment from the AHDB which looks at the effects of changes in trading relationships, subsidy levels and labour availability across all the main farming sectors.

The AHDB has considered three possible post-Brexit scenarios for its analysis, setting out different levels of trade liberalisation, cuts in farm support and labour availability. The impacts have been modelled for all six AHDB sectors.

See also: Farming without subsidy – New Zealand’s experience

Its main findings are:

• In sectors where direct support accounts for a significant proportion of farm income, (cereals and lowland beef and sheep) reduced support levels lead to a dramatic fall in profitability
• Trade issues also have a significant bearing on farm business income. In areas such as dairy, pigs and horticulture, where imports are dominant, farmers may actually benefit from rising prices due to the rising costs of trade
• In sectors where exports are significant, such as cereals and sheepmeat, rising costs of trade for UK products will put downward pressure on prices and incomes
• In sectors, such as horticulture, where labour forms the highest proportion of costs, restrictions on migrant labour will dent profits.

But, while incomes generally are likely to come under pressure, there is some cause for optimism as, whichever scenario is chosen, the higher-performing farms (top 25%) remain profitable in every sector.

“These farms are best placed to weather the negative impacts of any of the Brexit scenarios,” says the AHDB’s market intelligence director Phil Bicknell.

“They are capable of generating positive incomes, when the lower-performance farms are making losses.

“So farmers have the chance now to learn from that high-performing group, to use them as a benchmark for what is achievable in the way they run their own farm businesses.”

The AHDB says it intends to update its findings as various pieces of the Brexit jigsaw fall into place over the coming months and years, be it the details of a trade agreement or the future shape of any farm support policy.

It is also taking the study on a road trip, explaining the findings to farmers and offering advice on how they can get into the top-performance bracket.

Three different scenarios

The AHDB has considered three possible scenarios for its analysis:

• “Business as usual”, (or “Evolution”) where farm support and trading arrangements remain more or less as they are. Direct payments and labour availability continue unabated, and the UK has a comprehensive free trade deal with the EU. The UK is outside the Single European Market, however, so faces increased trade costs.
• “Unilateral liberalisation”, where farm support is cut by 50% and only paid via rural development funding, such as environmental delivery. Labour availability is restricted and import tariffs are set at 0% for EU and non-EU trade. Increased trade costs due to trade friction still push up farm prices for some sectors, but input costs fall due to lack of tariffs.
• “Fortress UK”, where farm support is cut by 75% and only paid via rural development funding, such as environmental delivery. Even tighter restrictions are put on labour availability, and World Trade Organization tariffs are applied to both trade with the EU and the rest of the world, pushing prices up for some sectors, and down for others.

It is worth noting the impact assessment does not attempt to build in other key variables, such as any changes in exchange rates, interest rates or economic growth.

Impact on farm incomes

Not surprisingly, the “business as usual” scenario is the most benign, and could actually see farm incomes rise for some sectors.

Being outside the single market will push up the cost of doing business, and those sectors that have net imports (pigs and dairy) will see prices rise in tandem, though export-oriented sectors, (red meat and cereals) may see some price pressure as exports falter and surpluses build up.

But, given the political maelstrom that is Brexit, no one is really expecting “business as usual”, and the other two scenarios are likely to have a far more adverse effect on farm business income.

In particular, the total removal of direct payments with only a partial increase in agri-environment/rural development payments, would drive incomes down.

“Under ‘unilateral liberalisation’, farm business income would fall for all farm types, with the exception of pigs,” says the AHDB report.

Upland livestock producers would probably benefit the most from the shift to rural development funding, but even for these farmers, any gains would be more than offset by a drop in the value of beef and sheep as lower-priced imports are sucked in from the southern hemisphere.

Similarly, under the “fortress UK” scenario – with tariffs applied to trade with both the EU and the rest of the world – all sectors would see a drop in farm income, with the exceptions of dairy and pigs.

“However, for some farm types (general cropping, lowland beef and sheep and horticulture), farm business income would be higher than under the liberalisation scenario, as the protection afforded by tariffs would allow domestic prices to rise, more than offsetting lower [support] payments.”

The AHDB notes that the impacts will also be affected by supply decisions taken by retailers and consumer preference – for example, whether they decide to opt for the cheapest or prefer to “back British”.

In-depth assessment

More in-depth research by AHDB shows for each sector – cereals, general cropping, potatoes, horticulture, beef and sheep (LFA and lowland), dairy and pigs – so-called “high performance” producers (top 25%) continue to make healthy profits, whatever the scenario.

But low-performance farms (bottom 25%) are “in the red” across all sectors post-Brexit, with “fortress UK” generally producing the worst results.

It is also generally the case that farm business income increases in tandem with farm size – regardless of which scenario is applied.

But the AHDB also points out that “high performance” is not necessarily the preserve of large farmers, and there is scope to improve performance across the size spectrum.

All farmers should, therefore, focus their attention on knowing their relative performance through benchmarking, and seek to improve output and contain costs.

And, despite UK farmers’ proven ability to absorb and adjust to shocks, the AHDB says government should encourage knowledge exchange and skills training to assist with the process.

More detailed, sector by sector analysis, can be seen in the AHDB’s full Brexit report.