What will Brexit mean for trade in farm goods?

A recent report from the Agriculture and Horticulture Development Board has tried to assess the likely impacts of Brexit on future trade in agricultural products. Philip Clarke summarises the key findings.

With farm subsidies set to fall, trade more than anything else will hold the key to farming prosperity post-Brexit.

Much is still uncertain, not least because negotiations with Brussels on the terms of leaving the EU have yet to get going.

Will the UK still have access to the single market, or will tariffs be imposed on imports and exports between the two areas? And what about tariffs on food and raw materials from other parts of the world? Will they rise or fall?

See also: Where next for EU agricultural markets?

For every sector there will be threats and opportunities, and these have been spelled out in the recent Horizon report from AHDB looking at the impact of Brexit on trade in agricultural goods.

Dairy

Trade
The UK is a net exporter of skimmed milk powder, but a net importer of butter and cheese. Trade is predominantly with the EU, with much liquid milk heading to Ireland, to return as processed product.

Overall, the UK imports over £2bn of dairy, and exports just over £1bn worth.

Tariffs
High tariffs currently protect the EU from most imports of butter and cheese, apart from New Zealand butter and Swiss cheese under preferential terms.

The new trade deal with Canada will also open the EU to more Canadian cheddar, while protecting EU speciality cheeses sold in Canada with “geographic indication” status.

Opportunities
If the UK opts for a “soft Brexit” and retains full access to the single European market, not much will change. But if it is outside, it is likely tariffs will be put in place, making it harder for the UK to export and more expensive to import.

In this case, the UK would be more dependent on domestic production and the dairy sector should grow.

There may also be opportunities to export more to non-EU countries, if favourable trade agreements can be brokered, as places such as China consume more dairy.

Threats
If tariffs are imposed by the EU on UK dairy exports, then processors may be less inclined to invest, at least until trade deals are struck with other parts of the world.

There would be particular problems with Ireland. Tariffs would make the import of Irish dairy products uneconomic, while the UK might struggle to process all the liquid milk that is currently sent south of the border.

Conversely, if the UK government decides to cut import tariffs, the dairy sector would be vulnerable to cheap butter and cheese imports from New Zealand, the US and Canada, driving down prices.

Beef

Trade
As with dairy, imports currently dwarf exports – the legacy of the BSE crisis and foot-and-mouth. Over 90% of exports and imports are to and from the EU, especially Ireland.

Exports are predominantly of whole carcasses, while imports are mostly more valuable boneless cuts.

Tariffs
Current EU import tariffs, which also benefit the UK, amount to roughly 50% of the value of the meat, which provides strong protection from non-EU supplies.

Quotas allow up to 118,000t of beef into the EU at lower tariffs, of which 16,000t last year reached the UK – less than 2% of total production. A ban on beef raised with hormones offers further protection.

Opportunities
Failure to agree full access to the single European market will likely see tariffs imposed on EU imports, making them more expensive. The market would tighten and prices would rise sharply.

As for new markets around the world, these continue to be constrained by BSE restrictions, though some are reopening.

There may be opportunities in China, which has big demand for offal, though New Zealand and Australia already have FTAs with China.

Threats
With no trade deal with the EU come Brexit, UK exports would face tariffs, with a particular effect on cow beef, for which there is little domestic processing capacity. Facing tariffs for the carcasses to be exported, and tariffs for the processed products to be returned, the trade would die and prices collapse. Also, should government decide to cut tariffs on third-country trade, the UK would be vulnerable to low-priced imports from the US, South America and Australia. But non-tariff barriers resulting from things such as use of growth hormones may still limit imports.

Sheep

Trade
Unlike beef and dairy, trade in sheepmeat is much more balanced, with imports and exports more or less the same.

Most exports are to France, and most imports are from New Zealand, designed to counter seasonal imbalances between supply and demand. Most exports are of carcasses, while imports are mostly bone-in cuts.

Tariffs
Most imports currently come in duty free under quota arrangements. Non-quota imports have to pay a 50% tariff, so not much gets in to either the UK or EU. Ninety-five percent of UK sheepmeat exports are to the EU, ie tariff-free.

Opportunities
The UK struggles to be competitive in markets beyond the EU, though lower value cuts and offal could be priced in to China if the government can negotiate an FTA with Beijing.

The UK market could also benefit if the government can reduce its share of tariff-free sheepmeat following Brexit, leading to higher prices.

Threats
With less imports, producers would experience much greater price volatility, as seasonality came into play. Sheepmeat is already expensive and a tighter market may force consumers to switch to other meats.

If the UK reduces tariffs or extends quotas post-Brexit, then producers will face tougher competition and lower prices. If the UK faces tariffs on exports to the EU, then more product would have to find a market at home.

Cereals and oilseeds

Trade
The UK is a net exporter of grains – the amount depending on the size of the harvest and the exchange rate. Over 90% of cereals goes to the EU, mainly Spain.

Asia is also a growing market, but wheat has to compete with maize. Oilseed exports are primarily to Germany for biofuel production. Imports are dominated by milling wheat and soya for feed.

Tariffs
Most grains and oilseeds are traded with either low or no tariffs. Ukraine can export to the EU/UK duty free; for other sources there are usually quotas with tariffs set low.

Opportunities
Given that grains and oilseeds are relatively free-trading anyway, the UK should continue to have good market access, so long as it delivers on price and specification. The UK could apply stricter specs on imports to protect UK growers.

Threats
Reduced access to the EU single market is a threat, if tariffs were imposed by Brussels. The UK would have to find more outlets on the world market, at lower prices. Similarly, if tariffs are removed on imports, the UK will be more affected by global gluts and shortages.

What conclusions can we draw?

Like many economic reports, the AHDB’s Horizon is good at setting out the options, but not so good at drawing conclusions.

That is hardly surprising. Article 50 has not even been triggered and there is a long way to go until the shape of a Brexit deal is any clearer. Only once that is in place will negotiations with other parts of the world really gather pace.

When it comes to negotiations with the EU, there are two schools of thought.

Optimists say that EU will not want to jeopardise its own exports to UK, so will be keen to sign a deal that maximises trade flows between the two without the hindrance of tariffs. That’s the economic argument.

The counter argument, however, is that the EU will not want to make it easy for the UK to leave and thereby send the wrong signals to other member states considering leaving.

Continued free access to the single market will only be allowed in return for totally free movement of people and a hefty contribution to EU coffers. That’s the political argument.

As ever in Brussels, it seems likely that the political argument will hold sway over the economic one.

Given that controlling the movement of people is one of the Brexit camp’s holy grails, it seems highly possible that some level of tariff is to be expected on future trade with the EU – especially for so-called “sensitive” products including agricultural commodities.

And then there is the other matter of trade deals with the rest of the world. Currently the UK enjoys significant protection from the EU tariffs that surround its borders.

But how long those last in a post-Brexit world is questionable. As cross-bench peer and former CBI director general Lord Digby Jones recently predicted, the UK will likely open up to imports of food and other agricultural produce in exchange for selling its financial services and other goods to places such as India and Africa.

Of course all of this is conjecture – though well within the realms of probability.

All that can really be said for sure is that none of this will be quick and businesses – including farm businesses – are likely to be languishing in limbo for some time yet.