Trade Policy Insights: Brexit impact on agriculture and the food supply chain

Author: Daniela Stratulativ, Head of Global Trade Analysis, IHS Markit Maritime & Trade

Key Points:

• Post-Brexit, the UK has to provide funding for farmers and rural communities development to replace the EU funding of 26 billion EUR.
• The UK Agriculture Bill 2017-2019 that will provide funds for agriculture is still in the House of Commons; there is no set date for the next stage in the long process required to pass it as law.
• The new EU - Unfair Trade Practices Directive for the protection of farmers will not protect the UK farmers when doing business with buyers in non-EU countries.
• Post-Brexit tariffs and non-tariff measures will lead to a fall in agricultural exports, low profit margins, and job losses in the food and drink industry.
• The UK imports 60% of the food it consumes. Tariffs will lead to an increase in price of agricultural imports and affect consumers as soon as the UK starts trading on WTO rules.

UK Agriculture post-Brexit losses: EU funding and the EU - Unfair Trading Practices Directive

The UK agriculture sector will face two major losses after the UK leaves the EU. The first is the EU funding for the farming and rural communities development, a total of over 26 billion EUR over 2014-2020. The second is the protection of the UK farmers against unfair trade practices through the new EU - Unfair Trading Practices Directive (EU - UTP). After Brexit, only UK farmers doing business with buyers in EU states will be protected.

To address the issue related to the EU funding for agriculture, the UK will have to replace the EU support for farmers and rural communities in time for leaving the EU.

The UK government has started the Agriculture Bill 2017-2019 that will provide the direct payments to farmers during the post-Brexit transition period until the end of the current Parliament, which can run until 2022. The Bill has been with the House of Commons since September 2018. To become law, the Bill has to go through several stages in the House of Commons and in the House of Lords, and it has to receive Royal Assent. The Bill was reviewed in the House of Commons in November last year. There is currently no set date for the next stage in the process. It is critical for the agriculture sector that the Bill becomes law before the UK exits the EU, to replace the current funding from the EU.

Farmers and rural communities receive over 26 billion EUR funding from the EU through the EU Common Agriculture Policy (CAP) during 2014-2020. The CAP was established in 1962. It is implemented using two main financial mechanisms: European Agricultural Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD). The EAGF provides direct payments to farmers and the EAFRD provides funding to rural communities to ensure balanced development across the UK.

The UK receives direct payments of 21 billion EUR from the EU (EAGF) for the 2014-2020 period. The funding is distributed as follows: England 70%, Scotland 20%, and Northern Ireland and Wales 10% each. The UK is the recipient of the fifth largest sum from all the EU states. The subsidies can make up to 80% of a UK farmer's income.

The EU funding for rural development (EAFRD) allocated to the UK consists of 5.2 billion EUR for the 2014-2020 period. The UK receives the seventh largest amount across the EU. England will receive 67%, Scotland 16%, Wales 13%, and Northern Ireland 4%.

It is clear the UK exit will impact the agricultural sector across UK, therefore the UK government must ensure the Agricultural Bill includes all necessary measures to prevent losses for the farming and rural communities, and the Bill is passed in time for the UK exit from the EU. It is also important for consumers that any trade negotiations on agricultural products take into account the standards and regulations now in effect, related to food safety, health and environment.

In regards to the second issue - the EU - UTP Directive for the protection of EU farmers, the UK will have to design its own policy to ensure protection of its farmers against unfair trade practices.

The Directive identifies 16 unfair trading practices involving suppliers and buyers. It prohibits ten practices, such as buyers not paying farmers on time, buyers asking farmers to pay for wasted food, or cancelling orders on short notice. The other six practices are allowed only "subject to clear and unambiguous agreement beforehand". These refer to marketing and advertising, when the buyer expects the supplier to contribute to the cost of promoting the products. The EU - UTP Directive applies if at least either the buyer or the supplier is located in the EU. Therefore, UK farmers working with buyers in non-EU states will not be protected. The EU - UTP Directive has been adopted by the European Parliament in March, and has to be adopted by the current European Parliament before it can enter into force. After it enters into force, each member state has 24 months to adopt it as national law and to designate an authority to enforce it. After another six months, the member state must start applying the Directive.

New trade rules

After the UK leaves the EU, replacing the EU subsidies for farming is not as easy as using the UK payments to EU to pay the farmers and ensure the development of rural communities. There are risks and losses that the agriculture sector will incur. UK products will be subject to tariffs under WTO rules, therefore they will not be as competitive as products of other EU states. In addition, UK producers will have to ensure they retain the certifications for food safety and health and meet the requirements of the EU member states.

What to expect - Effect on the UK food and drink industry

Post-Brexit, UK businesses will be trading under WTO rules. Businesses that are part of global supply chains, importing raw materials and products, will incur higher costs. Businesses will pass on these costs to the consumers when selling domestically, or will increase the price of finished products for exports. In addition, there is a risk for companies to reduce operations, since higher costs mean lower margins and job losses.

The UK produces only 60% of the food it consumes. Since 40% comes from imports, we expect food prices to increase significantly and affect consumers across the UK.

The UK agricultural imports in 2018 reached 67 billion USD and close to 44 million tonnes. Main imports were beverages (wine and beer), fruit and nuts, meat, vegetables, preparations of cereals, flour, and dairy. Exports reached 32 billion USD and 14 million tonnes in 2018. Top exports were beverages (whiskey and beer), cereal, dairy, meat, and prepared animal feed.

The figures below show the main agricultural imports where we expect an increase in prices, and the top exports where we expect a fall in trade.

The UK food and drink industry must support innovation in order to grow. For example, there is a shift from a demand in soft drinks to a demand in functional beverages. Industry reports show that after the EU referendum, revenue fell due to weakening consumer confidence, hence lower domestic demand. In addition, Brexit brings uncertainty in the food and drink industry in regards to labour. The sector employs over 100,000 EU workers from outside the UK, representing more than 25% of the food and drink workforce of over 450,000. The whole UK food supply chain employs four million workers.

The top companies in the UK food and drink industry with turnover of more than two billion GBP are Associated British Foods, owner of Kingsmill brand, Boparan Holdings owning Fox biscuits, Arla in dairy sector, Greencore Convenience Foods - sandwich producers. Other major producers include Müller UK & Ireland, Unilever, Coca-Cola Enterprises, Bakkavor, Mondelez UK, and Nestle UK.

Post-Brexit, there will be shortages or delays in imports of certain products, due to customs checks and higher tariffs. Fruit and vegetables imports will likely be affected by new customs processes and long delays at the border. The whole UK food supply chain will be affected by a fall in exports, increased prices of agricultural imports leading to lower margins and job losses for small and medium enterprises. Consumers will pay more for the same agricultural products they used to buy and will have lower disposable income to spend or save. Lower spending will affect other sectors of the economy, through lower demand leading to job losses. These are challenges the UK government, businesses and consumers will face post-Brexit.

Full description of commodity codes:

02 Meat And Edible Meat Offal

04 Dairy Produce; Birds' Eggs; Natural Honey; Edible Products Of Animal Origin, Nesoi

07 Edible Vegetables And Certain Roots And Tubers

08 Edible Fruit And Nuts; Peel Of Citrus Fruit Or Melons

10 Cereals

16 Edible Preparations Of Meat, Fish, Crustaceans, Molluscs Or Other Aquatic Invertebrates

19 Preparations Of Cereals, Flour, Starch Or Milk; Bakers' Wares

21 Miscellaneous Edible Preparations

22 Beverages, Spirits And Vinegar

23 Residues And Waste From The Food Industries; Prepared Animal Feed

This column is based on data from IHS Markit Global Trade Atlas (GTA). Risks, opportunities, impact on supply chains and shipping industry can be identified for any products at 6-digit code level within GTA. Insights can be complemented with bill of lading data from PIERS and vessel movements via AIS.

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