I gave a presentation on Brexit and agriculture to a group of insurance providers and brokers involved with farming at Bishop Burton College this week.
I started by emphasising that it is important to bear in mind that farm businesses vary considerably and this affects their ability to respond to Brexit. Some of the key variations are:
- Soil type
- Ownership structure: owned, tenanted, mixed (increasingly common)
- Size of farm
- Diversification: how much of the farm business is dependent on farming? Most common: agricultural contracting; tourism; on farm niche value added production, e.g., cheese, yoghurt, ice cream; farm shop and/or café. Most of the low hanging fruit has been taken. One needs the right management skills and management resources can be taken away from the farm business.
What does this imply for farms? It is important for farms to spend some time and effort (and probably money) analysing their businesses and how they will be affected by Brexit Is this a commodity business pursuing economies of scale or a niche business? Should we expand or downsize? Succession issues require attention.
The CAP has been a dysfunctional policy. It was not designed with UK agriculture in mind or contemporary problems. Basic payments have been only tenuously linked to outcomes Policy instruments have been poorly designed and often impact farm businesses without securing desired outcomes. It has encouraged the intensification of agriculture.
There is an opportunity to design a better domestic policy, but whether this will be seized is open to doubt. Current proposals are too concerned with pleasing an urban electorate.
I outlined three broad brush scenarios for Brexit:
- Leaving with no deal on WTO terms
- Some kind of less than satisfactory deal
- A comprehensive agreement. The last is very unlikely given the time that is left and the difficulties that have been encountered in the negotiations so far.
Could the negotiating period be extended? Extending the negotiating period would require the consent of all 27 member states. The EU does have a history of ‘stopping the clock. But I have looked at the ways in which constitutional lawyers say this might be done and none are very convincing.
The UK has a governing party that has been negotiating with itself, but also a split opposition party with unclear policies. There is no sure majority in the Commons for any path to Brexit. A second referendum would shift the decision from a deadlocked Parliament to a deadlocked people, and what would the question be?
It is in the interests of both the UK and the EU to come to some sort of agreement. There have been some signs of a softening of the Commission position. At some point the member states are going to have to get more involved, in particular France and Germany, but they have different positions: France hopes to poach UK jobs and business and German domestic politics are fragile.
Northern Ireland is the most difficult issue. Original EU proposal in March would have given EU courts and regulators near unimpeded jurisdiction over the province. The EU is now considering limiting powers of EU authorities to make checks on UK territory and giving the ECJ only indirect authority. However, the Democratic Unionists are capable of vetoing any solution that outsiders might consider reasonable.
A no deal exit has been talked up. Some of this is people playing political games to suit their own ends. There is also an element of brinkmanship as the case in many negotiations A no deal exit is certainly possible, and it is a scenario I will consider in relation to agriculture, but I don’t think it is the most likely outcome.
An eleventh hour fudged compromise is more likely. EU decision-making characterised by last minute deals. This would leave many issues unresolved that would have to be addressed during the transition or implementation period. But during that period economic relationships would continue much as before.
The fudged compromise still leaves some problems. The Basic Payment is the difference between profit and loss for many farms. It will be phased out (in England & Wales) Public good payments will be more unpredictable, they may involve higher transaction costs and they are more likely to yield income for upland farms.
It's decision time for farms. Do they continue in business? One consequence could be a consolidation into larger units. Land prices could be driven down and they have constituted a barrier to new entrants. However, land prices are also boosted by tax benefits and interest in the sporting value of estates.
The growth rate of productivity in farming is poor (0.9 per cent a year, USA 3.2 per cent, Netherlands 3.5 per cent). Brexit might shake out less efficient farmers who are ‘making do’. Younger entrants might be more open to the possibilities of new technology.
Farmers have shown themselves to be resilient and many are innovative. They may have to rethink idea that expansion was always the answer. They need to analyse their individual farm business.