Project Brexit

Agriculture will be hugely changed when we leave the EU – whether by exchange rates, trade deals, or subsidy reviews. What might that future look like?

It’s going to be the greatest challenge UK agriculture faces in a generation; how will farm businesses shape up outside the EU?

Regardless of sector and geography, all British farms will be affected.Those who have traditionally used Common Agricultural Policy (CAP) support to protect themselves from volatile market forces may now see new obstacles in their way, while other businesses might view the potential changes as an opportunity to develop and grow.

Clearly it’s all to play for, and while lobbying groups put forward their wish lists, it’s time for farmers to start understanding how the decisions made in Westminster could harm or strengthen their businesses for years to come.

 

Forward planning can start now


Despite UK farming’s deep reliance on subsidies, free trade deals and access to seasonal labour, polling carried out by Farmers Weekly before the referendum indicated that the majority of the farming community backed leaving the EU. Pre-vote polling showed 58 per cent of farmers planned to vote in favour of leave and only 31 per cent in favour of remain.

"When the news broke, despite the support for Brexit, there was an underlying feeling of uncertainty and an element of surprise that the yes vote carried the day," says Andrew Wraith of Savills Food and Farming. "But the recent government announcement that subsidy support will remain until 2020 has meant a few farmers have, perhaps, parked the issue for the time being. In addition, the recent reduction in sterling’s value has supported UK commodity prices, creating a feelgood factor."

Forward thinking farm businesses are already looking ahead and considering their options if the level of farm support or trade deals change. "They know they’re good at what they do," says Andrew, "but the concern is what happens if a Brexit deal creates an uneven playing field?

"We’re looking at the variables over the next four to five years, to put businesses in the best place possible regardless of what happens in a very unclear world."

 

Subsidy reliance could be unsustainable


The future of farm subsidies has been the most talked about topic in agricultural circles since 24 June.

UK farm businesses have become heavily reliant on the annual Basic Payment Scheme (BPS), with 55 per cent of the UK’s total farming income coming from CAP support payments, according to Defra’s latest figures.

The National Farmers’ Union says that in 2015 UK farmers received £2.4 billion in direct support (Pillar One), and that they will have access to €5.2 billion in rural development funds (Pillar Two) allocated from 2014-2020, the value of which will be linked to the exchange rate.

The most recent CAP saw a change of direction, with much less direct support under Pillar One for Europe’s farmers, and more available in Pillar Two in exchange for environmental measures.The UK government is free to reincarnate the BPS in whatever form it chooses, but Ian Bailey of Savills Rural Research, thinks farmers should prepare for the trend to continue.

"My view is that the environmental side will have a much higher priority," says Ian. "I expect there will be an increased shift to the Pillar Two payments and Pillar One direct payments will be smaller. But there’s a lot of water to go under the bridge. Resilience is key," he says.

Budgeting and benchmarking will be essential tools to ensure farmers know their costs and their business. If you don’t do that you can’t understand what impact a drop in support or a change in trade will have on your business. We are regularly updating our analysis and business appraisals using various possible scenarios."

Modelling work that Ian has carried out using Savills Virtual Farm demonstrates that if subsidies were reduced by 25 per cent it would wipe 14 per cent off a farm’s profit, while a 50 per cent reduction would remove 42 per cent.

 

Land values and the rental market


So far, the effect of Brexit on farmland values has been muted.

"Agricultural land tends to do well in times of economic uncertainty," says Ian. "In addition, the weak pound creates opportunities for overseas buyers. Both of these factors, along with the anticipated reduced supply, may help support farmland values."

Values had already shown signs of a slowdown during the first three quarters of 2016 when the average value of farmland across Great Britain fell by 2.6 per cent.

"Values are often driven by local demand, and when you factor in that 40 per cent of buyers are non-farmers with other interests we expect asset values to remain safe," Ian says.

However when it comes to land rental values, both landlords and tenants will be more sensitive to a reduction of subsidy support. "Our market intelligence suggests that the prospect of reduced support will have negative pressure on rental levels. "Evidence from some recent tenders suggests that bidders may be prepared to offer a smaller premium for land with entitlements (compared to naked acres) than was the case before the referendum.There is also some evidence of landlords and tenants considering shorter terms and/or break clauses to give them tenure flexibility."

 

Trade not talked about enough


"Much of the post-Brexit discussion has focused on what support might look like, while trade doesn’t get the emphasis it should," says Andrew.

"Is there sufficient understanding of the protection we get at the moment and what we could lose in any free trade agreement when we come out? It might be good, but there could be many things that could challenge us."

Today the single market gives UK businesses access to the world’s largest economy with more than 500 million people.

The Food and Drink Federation says that the UK is a net importer of agri-food products, totalling £39.6 billion in 2014, but that it also exported £12.8 billion worth of products. Approximately 73 per cent of UK agri-food exports were destined for other European member states.

For some sectors the EU market is critical: 38 per cent of all lamb produced in the UK goes to Europe – France alone purchased more than £200 million worth of UK lamb in 2014.

Ian says: "Our analysis so far is showing that trade may be far more important than subsidy. It will depend which way trade deals go, but the effect on price and output volumes may well be greater than any that a subsidy change might have."

Trading with Europe might also incur taxes which are not currently applicable to the UK. In 2015 the UK imported £2.9 billion worth of basic agricultural products from the EU. If the Common Customs Tariff (CCT) was applied to those imports, the additional cost would be nearly £1.5 billion, with an average tariff of 50 per cent. In the same year, the UK exported £1.2 billion of those products to the EU and, if the CCT were applied, it would mean additional charges of £790 million, or an average tariff of 66 per cent.

"Together the total additional costs to UK-EU trade in basic agricultural products from the application of the CCT would be just over £2.2 billion – roughly the same as the whole Pillar One payments to UK farmers."

 

Exchange rate already taking effect


In early October, sterling plunged to a 30-year low against the dollar, and continues to be significantly weaker than it was against the euro. But farming tends to do well when the pound is weak for a number of reasons.

The CAP is set in euros, and how much money UK farmers receive is determined by the average exchange rate between the euro and the pound in September. With the weakening of sterling there will be a 16.5 per cent increase in farmers’ EU subsidies next year – more than an extra £500 million.

In addition, Ian says: "The weak pound means it’s good for exports and our tourism industry is already benefiting. Farmers with a diversified income could do well from it."

Of course it’s not all good news. Businesses that rely on imported feed or fertiliser, for example, are facing significant price rises.

 

Time to work together for the new policy


Andrew says: "There is an appetite from farm businesses to know their position and understand the impact of change. While at the moment we clearly don’t know how things will pan out in any detail, understanding the ramifications of certain fundamental aspects of current support and trade arrangements will hopefully allow businesses to positively engage in policy development.

"I think that rather than getting adversarial, farming needs to work with other lobbying groups to develop a well worked-out policy. More pressure can be put on the government to get a progressive policy. If it becomes adversarial we’re not going anywhere fast."

 

 
 

Key contacts

Philip Gready

Philip Gready

Executive Director
Rural, Energy & Projects Division

Savills Margaret Street

+44 (0) 20 3107 5470

+44 (0) 20 3107 5470

 
 

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