UK grains farmers' income may see over 100% drop post-BrexitThis article is powered by The Public Ledger
A post-Brexit scenario study forecasts that income for UK cereal farmers could plummet by more than 100%, depending on a number of factors.
In a report released today (October 11) published by the AHDB and produced by Informa Agribusiness Consulting, part of the same group as IEG Vu, in association with Promar International, the potential financial gravity for British farmers once it leaves the EU, is outlined.
“The UK’s decision to leave the EU has created a great deal of uncertainty for the agricultural sector,” indicated the report with the suggestion that, “steps to improve productivity and performance would enable farmers to mitigate potentially negative impacts of leaving the EU, even before details on agricultural trade or policy emerge.”
The average FBI (Farm Business Income) for cereal farms, currently at GBP43,796, could potentially fall between approximately 80-100% depending the scenarios outlined by AHDB. If UK farmers unilaterally open its borders to low-cost food producers, this would lead to a 81% drop in cereal farmers’ FBI to GBP8,216, mainly driven by the removal of key EU funding for the sector.
“Decreases in the value of production output and increases in regular labour costs also have an impact…there is likely to be increased pressure on the less efficient farmers and there may also be downward pressure on farm size in order to reduce labour costs,” added the report, which can be downloaded here.
Under another scenario, where the UK implements protectionist trade barriers, cereal farmer’s income would drop even further by 103% to a negative figure of -£1,341.
“There is likely to be severe pressure on the less efficient farmers and downward pressure on farm size in order to reduce costs of paid labour,” indicated AHDB.
Only under a “business as usual” scenario where policy, regulatory framework and trading relations remains as close to the status quo as is possible, will cereal farmers income only see a smaller drop of 9% to £39,788,
“The 9% decrease…is driven mainly by decreases in the output values for oilseed rapeseed and barley, caused by the loss of export potential, which is not compensated for by the smaller increase in the value of wheat output; the FBIs of farms relying on these two crops will be especially vulnerable,” said the report.
"...If the UK were to have an exportable surplus of wheat, such as from a year of unusually high yields, it would not be possible to sell this competitively on the export markets..."
The three scenarios are outlined as follows:
Scenario 1, dubbed ‘Evolution’, is essentially a status quo scenario, albeit with additional costs of trading assumed as a result of the UK’s departure from the Single Market.
Scenario 2 (‘Unilateral Liberalisation’) assumes the end of Pillar One payments, with Pillar Two-type increased to equal 50% of total current P1+P2 support. The UK unilaterally removes tariffs on all imports, while UK exports would be subject to WTO MFN tariffs. Migrant labour would be reduced by 50% for regular employment and there would be a small saving from some relaxing of the regulatory framework.
Scenario 3 (‘Fortress UK’) would see no more P1 payments, P2 supports cut to 25% of current total (P1+P2) support, and also almost all agricultural trade carried out on the basis of WTO MFN tariffs. As with Scenario 2, migrant labour would be restricted by 50%, but this time for regular and casual positions.
“We are aware that this doesn’t make for comfortable listening and that it (the outlook) doesn’t look good,” said AHDB director Martin Grantley-Smith at the Grains Outlook Conference today (October 11).
“It may seem that we are being over dramatic (in this report), but it may be the jolt that moves us forward," he said at the event attended by IEG Vu.
However, AHDB senior analyst Sarah Baker, reminded delegates that the report only outlines the potential outcome in light of an unprepared market.
“Remember that the study is made under the assumption that farmers do nothing, so if this scenario happened tomorrow, this is what would happen," she indicated.
"We know how flexible and resilient farmers are, so this is very much a static analysis that farmers will do nothing in response to Brexit…but we are keen for the industry not to sleep walk into Brexit," she said at the event in London.
Shifts in production
There could also be a shift in production away from barley and oilseed rape and towards wheat and other crops such as potatoes and sugar beet, AHDB added.
Overall, cereal and oilseed farms are likely to lose public support payments which would see large-scale producers tending to be efficient and able to compete near the world market price.
However, AHDB’s report indicates that the study is based on the assumption that the UK remains a net importer of wheat.
“If the UK were to have an exportable surplus of wheat, such as from a year of unusually high yields, it would not be possible to sell this competitively on the export markets due to the additional trade friction costs and/or tariffs. This would result in further reductions in FBI,” it added.
The report also predicts the price impact for a number of UK farm products by scenario, which are summarised in the following chart.
'Quantitative modelling for post-Brexit scenarios' is published by the UK Agricultural and Horticultural Development Board (AHDB) and produced by Informa Agribusiness Consulting, in association with Promar International.
For more information on the agri-food economic & policy analysis services offered by Informa Agribusiness, follow this link: www.ceasc.com