Following the outcome of Thursday’s Brexit referendum, I’ve received a number of requests for Gro’s thoughts on the agricultural ramifications of the United Kingdom leaving the European Union. We’ve already examined the potential impact of a Brexit on Ireland’s agricultural sector in a previous Insight, and we also plan to publish a more detailed Insight on Brexit’s effect on other regions later this week. In the meantime, we’ve put together a brief analysis on the larger implications of the exit for the United Kingdom and global agriculture.
Despite a lack of details on the nature of the United Kingdom’s exit from the European Union or the subsequent trade agreements that will follow, many have already started to predict Britain’s future and the global implications of Brexit as apocalyptic. Although so much remains unclear, some discrete outcomes in the agricultural sphere can be grasped and should be closely followed.
UK agriculture and food producers will be thrown into the unknown in the absence of the EU’s subsidies and tariff benefits. This is as true for English dairy farmers as it is for Scottish whiskey distillers. Food costs will likely rise in Britain. And countries like China trading with Europe must now negotiate separate trade arrangements for the EU and Britain. It’s still anyone’s guess who will have the upper hand in this contest. China may also play a critical role if it’s able to absorb demand lost from a shaky, post-Brexit Europe. Here’s what our initial analysis reveals.
Market implications hinge on post-Brexit subsidies
The agricultural subsidies provided by the European Common Agricultural Policy (CAP) have become a lifeline to many farmers in the United Kingdom. In fact, the National Farmer’s Union estimates that 55 percent of total income from farming in the United Kingdom comes from CAP support. The fault line for Brexit support across the United Kingdom can also be seen from how EU farmer subsidies are disproportionately shared throughout the United Kingdom, with Scottish farmers receiving subsidies that are three times higher than their English counterparts.
After the United Kingdom’s historic vote, the salient question for the country’s agriculture sector is whether there is sufficient political willpower to maintain current subsidy levels for growers. UK agricultural production doesn’t play a significant role in setting global commodity prices, but it’s nothing to sneeze at either. The country in 2013 was still the 10th largest producer of milk in the world, ninth largest grower of barley, and fifth largest producer of sugar beets. Without subsidies, UK producers of these and other commodities may no longer be competitive, and other global producers would have to fill in the gap.
According to Farming Minister George Eustice, the United Kingdom will effectively receive an 18 billion–pound a year “Brexit dividend,” therefore the country, in theory, should be able to afford the 3.1 billion euros (2.4 billion pounds) in direct payments that UK growers received from the European Union in 2015. Nevertheless, there are vocal skeptics, such as Agra Europe, who aren’t so certain that the United Kingdom will maintain such lofty subsidy levels and envision a post-Brexit doomsday scenario where up to 90 percent of the country’s farmers face financial ruin. Given the potential for food inflation to present UK voters with a dose of painful reality, however, it is hard imagine a realistic scenario in which UK politicians would risk the future of the country’s agricultural output by skimping on subsidies.
Fight inflation, forage globally
For British consumers, food prices are likely to rise dramatically—in fact they already have. At one point the day after Brexit, the pound had already fallen 11 percent against the dollar to $1.3224, its lowest level since 1985. Likely to remain one of the world’s largest food importers by value, Britain is understandably going to suffer a precipitous rise in food prices.
Of the roughly 46 percent of its food supply that United Kingdom imports annually, meat products, fruits, and vegetables are likely to account for the majority of inflated food prices. While the European Union supplied 27 percent of the United Kingdom’s food supply in 2014, and North American, South American, and Asian exporters contributed only 12 percent collectively, this too is likely to change post-Brexit. Ireland is the origin of nearly 70 percent of the UK beef imports, and receives prices high above the world average due to both proximity and a shared single market with the United Kingdom.
After tariffs are reintroduced post-Brexit, the United Kingdom will likely pivot toward the world’s other large beef exporters who demand noticeably lower prices per kilogram. On a happier note, UK farmers could potentially see increased export demand due to a weaker pound, although production costs will undoubtedly remain higher than for most of the world’s largest producers (and would be even higher if subsidies don’t stay in place).
Leaving will hit close to home for food and beverage producers
Free trade arrangements will be of the utmost concern, particularly to Scottish whiskey producers. Scotch whiskey adds 5 billion pounds to the UK economy, one of the UK’s most valuable beverage exports. The inherent branding value of Scotch whiskey is, in part, created by the European Union’s protected geographical indicator (PGI), which ensures that the product is only created by 117 distilleries within Scotland. No longer a part of the European Union, the United Kingdom will have to negotiate such concessions directly with trade partners. Without brand protection in future trade deals, Scotland would be left with yet another reason to exit the United Kingdom and remain in the European Union.
Britain’s food and beverage industry, which sends 60 percent of its exports to the European Union, would also be precariously exposed to higher tariffs if the United Kingdom reverts back to most favored nation (MFN) trade status with the European Union. In fact, processed dairy products could face a tariff of 48 percent, with sugars and confectionery, processed cereals, and beverages also facing steep tariff hikes.
Furthermore, companies in the United Kingdom will likely lose the business flexibility gained from the free flow of labor that accompanied membership within the European Union. Given that workers from other EU countries comprise 26.9 percent of the food industry's workforce in the United Kingdom and immigration was a major impetus for populist support behind Brexit, it is unlikely that the industry can expect the labor pool to be as strong in the years to come. Indeed, the brewing storm of uncertainty will likely cause multinationals to closely weigh the costs and benefit of future domicile within the United Kingdom.
Brexit and China
China’s relationship with the United Kingdom has blossomed over the past year, with the country becoming China’s most favored destination for investment in the European Union. Part of China’s interest in the United Kingdom was strategic as China hoped that the United Kingdom, as a prominent member of the European Union, could play a constructive role in promoting the development of China-EU ties. China had been pushing for the completion of a trade deal with the EU since 2013; without the United Kingdom as support for this deal, China may need to seek favor from other European Union countries. At the same time, as an independent nation, the United Kingdom is now able to form its own trade relationship with China, one that could be cemented before the EU-China trade deal occurs.
The timing is somewhat opportune as China’s demand for agricultural imports has accelerated, allowing China to potentially absorb some demand that is bound to drop in Europe as it gradually stabilizes post-Brexit. For example, Germany, Spain, and Denmark were the world’s second, third, and fourth largest exporters of pork in 2015, respectively, exporting a total of $9.5 billion worth. The majority of their exports were to other European countries (including the United Kingdom), where demand will likely fall due to political and economic uncertainty in an already shaky EU. China, meanwhile, has already experienced a rise in demand, and a large decline in Chinese swine breeding has resulted in a significant increase in pork imports (up 37 percent year over year), most of which was captured by the EU (exports up 57 percent). As Chinese production continues to contract, the country may absorb losses in Europe’s demand, allowing global prices to remain stable.
Although few specifics of the deal have been discussed, our initial research suggests Brexit is likely to hurt both farmers and consumers in the United Kingdom. Losing CAP subsidies may hurt British farmers. But a weaker pound and therefore more UK exports could offset some of the funding lost from the European Union. Still, it will be a messy affair, and political turbulence may lead to a wholly unexpected outcome. Especially if Brexit triggers a UK recession, some tough choices will have to be made.
The main beneficiaries, therefore, will be other global agricultural producers—such as those producing meat products, fruits, and vegetables in the Americas and Asia—that are better poised to capture potential UK market share vacated by unlucky EU partners. Global agricultural commodities markets may drop with an unstable and stagnant Europe, but China could restore some balance. The East Asian country may be in a position to absorb any losses in demand in Europe, equalizing the global supply and demand balance for major agricultural goods.
We plan to release an Insight piece later this week going into greater detail on the effects of Brexit for non-UK players. And in the coming months, we will be closely following any potential new trade policies that will need to be formed between the United Kingdom and the rest of the world as preferential bilateral trade policies could have large implications for global agricultural trade. Stay tuned.
Sara Menker, CEO