Risks for food and drink sector from Brexit

A report from a House of Commons Select Committee on Business, Energy and Industrial Strategy highlights some of the risks that the processed food and drink sector faces after Brexit.

'The processed food and drink sector is the largest manufacturing sector in the UK and contributes £28.8 billion to the economy. Exports were worth £22 billion in 2017 and they continue to grow. The sector directly employs 400,000 people throughout the country, a third of whom are EU nationals. It is characterised by just-in-time delivery of products with short shelf lives and is heavily integrated with supply chains spread across the UK and the EU for sourcing raw materials, processing goods and selling them. Many manufacturers have factories in both the UK and the rest of the EU.

The success of the UK processed food and drink sector has been so far highly dependent on participation in the Single Market and Customs Union: free movement of goods and people have tipped the UK export balance towards an over reliance on the EU as a trading partner with 60 per cent of UK exports going to EU markets. 50 per cent of total UK food and drink exports go to five countries, four of which are EU member states.

It is crucial that the sector is able to remain competitive when we leave the European Union as failure to do so would not only impact businesses and workers but also consumers at the till point and the choice available to them in shopping aisles all year round.

The sector would undeniably suffer from reverting to WTO tariffs in the event of a ‘no deal’ scenario. The EU’s Most Favoured Nation tariffs under WTO rules would be disastrous for UK exports and must be avoided at all cost. It is unrealistic to expect that the sector will stop relying on the EU as its main export destination at least in the short term. Consequently, the negotiation of a free trade agreement with the EU should be the number one priority for the Government. Should the UK lower or remove its tariffs on imports in the future, the consequences for British farming could be extremely damaging and the positive impact on prices for goods to households is likely to be very limited.

UK competitiveness would also be adversely affected by any additional delays and bureaucracy encountered at the UK-EU border, given the prevalence of cross-border just-in-time supply chains in the sector. The Government should seek to secure as few additional impediments to trade between the UK and the EU as can be negotiated. Frictions at the border between Ireland and the UK are of particular concern as the sector is highly integrated across the two countries. A credible solution to avoiding a hard border must be found as soon as possible.

The EU regulatory regime in food and drink is also highly integrated, and the UK is a full member of the European Food Safety Authority (EFSA). EU food regulation is associated with high safety and quality standards and already allows divergence. The majority of the evidence was in favour of remaining aligned with EU regulation as it is favourable to exports amongst other things but some opportunities from divergence were identified in a few sectors. Nevertheless, all were unanimous in rejecting any ‘race to the bottom’ as UK consumers would not tolerate any lowering of standards. Most stakeholders also supported the UK continuing its membership of EFSA after Brexit.'

The full report can be found here: Report

The future for agriculture

At last week's Agricultural Economics Society meeting, Jonathan Brooks of the OECD convened a panel on the links between agricultural market prospects and policy challenges at the global, European and UK levels.

At the global level, food prices increased sharply in 2007-8, sparking fears about food security as well as about the earth's capacity to produce enough food for a growing and increasingly wealthy population.

World population growth is slowing. The growth in consumption has halved over the last ten years and is not coming from per capita income growth with the exception of Africa. This pattern is different for dairy, sugar and vegetable oils. India is driving dairy demand. Cereal demand is driven by animal feed.

Since 2007-8, world agricultural markets have stabilised, with prices of most commodities well below the peaks of a decade ago. The return to lower prices has led to resurgent demands for agricultural protection, with several large emerging economies now adopting policies previously pursued by high income countries. PSE levels have increased in those countries.

Markets also remain vulnerable to periodic shocks, and many countries have sought to find ways of managing the risks such shocks pose to both producers and consumers, often via policies that may have a significant impact on world markets (such as public stockholding).

Over the next ten years, the demand for most agricultural commodities is projected to slow. This will provide relief to the supply side challenge of feeding a rising world population and provide greater room for policy makers to focus on the parallel requirements of using the world's resources sustainably and making an effective contribution to climate change mitigation.

One interesting point was that a small number of countries dominate the production of particular commodities which does lend some reinforcement to food security arguments. Russia and Ukraine are increasingly important in world grain trade, but could withdraw exports to protect domestic markets in conditions of tight supply.

What can we learn from New Zealand?

One of the most interesting panels I attended at the Society of Agricultural Economists conference at the University of Warwick was on what, if anything, we could learn from the reforms in New Zealand, often held up as an example of the benefits to be obtained from a radical eradication of subsidies. Interestingly, the position first taken in the discussion was that the experiences were so different in terms of geography, the prevalence of cooperatives, the timing and form of subsidies etc. that little could be learnt. However, as the discussion progressed, some lessons were extracted.

It is important to understand the context in which reforms took place. New Zealand was suffering from fixed exchange rates, the Think Big energy projects and high inflation, leading to a fiscal crisis. The subsidies were in place for a relatively short time and were also offered to manufacturing to offset the effects of a high exchange rate. Capitalisation into asset prices did not have the same impact as elsewhere.

For a long time New Zealand agriculture enjoyed preferential access to UK markets at guaranteed prices, but in the 1960s commodity prices fell. There were some really sad cases among farmers, but not that many went bankrupt. Because most farms were family farms, some use was made of unpaid labour.

New Zealand had first mover advantage with exports to China, but failed to follow through on that and let others capture market share. Hence, the first mover advantage was squandered.

New Zealand had 67.8m sheep in 1985 and 29.1m in 2015. The dairy herd has expanded, particularly on the Canterbury Plains, but this has led to concern about environmental impacts in terms of climate change and water pollution.

It was pointed out that the structure of cooperatives allowed the rapid transmission of intelligence from external markets to producers.

Some specific mitigation measures were provided. For example, although subsidies on interest payments were withdrawn, the actual payments were kept at the same level. There was also help with farm business plans.

The UK should aim for value added growth, but what sorts of policies did this imply? One approach might be to enhance the knowledge base.

Food, Brexit and Northern Ireland

Tim Lang and his colleagues have produced an important briefing paper on the issues that arise from Brexit for food in Northern Ireland: The critical issues

They argue, 'Food is central to the economy of Northern Ireland, and the continuing supply of safe, high quality, healthy food is currently dependent on the absence of border controls between Northern Ireland, the Republic of Ireland, Great Britain and the rest of the European Union. Hundreds of thousands of tonnes of food criss-cross these borders every year. They are currently free from inspection because of shared, underpinning EU Single Market regulation. An unplanned or mishandled food border imposition is likely to have powerful, destabilising consequences for the integrated nature of food supply, trade and access within Northern Ireland for many years to come. It would raise important challenges for food safety, put jobs at risk, potentially constrain Northern Ireland’s access to health-supporting foods such as fruit and vegetables, and create opportunities for food fraud and crime.'

They rightly rule out technological fixes for which specific details have never been provided.

Devolution choices after Brexit

The Institute for Government has issued a report on relations with the devolved administrations after Brexit which focuses on agriculture as one of the areas in which key decisions will need to be made. Some of the main points are reproduced below. The report as a whole can be accessed at: Devolution after Brexit

In particular, how can funding be distributed? Option one would be to use the Barnett formula, which would give greater flexibility to the devolved administrations, but leave devolved budgets more vulnerable to UK government cuts.

Distributing this funding through the Barnett formula would mean that the future level of agricultural funding available for the devolved administrations would be tied to policy decisions made by the UK government. While the devolved administrations would gain greater day-to-day control over how their budget is spent, they would run the risk of their budgets being squeezed in the event the UK government chose to cut the English agriculture budget.

Option two: The UK could decide to create a ring-fenced agricultural support budget, which would be the least change to the current arrangement An alternative approach would be for the UK to establish a new agricultural support budget, protected and separated from the wider devolution budget settlement and ‘block grant’.

The initial distribution would likely reflect the current split through CAP and these levels would be maintained until 2022; reflecting Michael Gove’s commitment to match-fund agricultural support payments. After that, there would need to be an agreement on how the budget was agreed for future years.

The Barnett formula would be one option, but the creation of a new, separate budget is an opportunity to take a different approach. A new budget could allow the governments to create a new funding mechanism, taking into account some of the criticisms of Barnett. The budget could be negotiated periodically, formally and at a four-nation level, as part of the UK government’s spending review.

A ring-fenced agricultural budget for each nation would offer a greater guarantee to farmers in the devolved nations, with funding levels set for a specific period of time. It would protect them against money being reallocated to other policy priorities. A ring fenced budget would also make the UK rather than the devolved governments responsible for resolving the difficult trade-offs between agriculture and other policy areas. Ultimately, from the devolved administrations’ perspective, agreeing to this type of budget could be a missed opportunity for greater autonomy in spending decisions, preventing them from making their own decisions around policy priorities and funding.

An important first step will be reaching consensus on what the UK ‘internal market’ is, and where divergence becomes market distortion. Just as the EU’s single market contains provisions to ensure a ‘level playing field’, the UK Government and the devolved administrations will need to consider what a UK level playing field should look like.