The Winds of Change: Brexit for the Rural Sector

The rural sector was a key battleground for the referendum debate. The NFU and NFUS came out in support of Remain, while polls indicated UK farmers were largely in support of Brexit.

We need to be mindful of pre-referendum hyperbole and post-referendum hysteria. The most likely assumption is the continuation of free trade, despite the fears of Remain, and a continuation of some form of free movement of labour, despite the promises of Leave.

However, there remain many risks for the agricultural sector. Rory Kennedy, Chiene + Tait Rural Estates Partner, comments “The majority of our agricultural exports are to the EU and tariffs would particularly impact on price-sensitive commodity products. That said, it is a two way process and the UK is a net importer of food and certain UK farming sectors have particularly suffered at the hands of EU imports. Notably tariffs would also severely impact Ireland as an EU member, which relies on the UK for around 59% of its EU exports of agri-products.”

Immigration was a highly emotive area, on which much of the Brexit campaign was fought. However, if the UK wants access to the single market, then free movement is a central tenet on which there seems little room for manoeuvre. Ultimately, limiting the supply of EU labour would not just stifle soft fruit and vegetable farming, but provide such an impediment to UK industry as to be an improbable option.

The obvious concern for UK farmers is what will happen to their EU subsidy, particularly as this comes at a tough time for many farmers as a result of falling commodity prices. UK farms are typically larger operating units than those on the continent. Our farming model is arguably more professionalised and heavily capitalised, yet still reliant on subsidy for a significant part (on average up to 50% ) of its income. Meanwhile smaller continental agribusiness units, such as the French model, are less intensive and the farmer’s income is often far more diversified. As a result, UK farmers are potentially more heavily exposed to reductions in subsidy level than their EU neighbours, with one study suggesting only 10% of UK farms could survive unsupported.

“Much of the historical dissatisfaction amongst farmers was the perception of inefficiency, peverse-incentives and bureaucracy within the Common Agricultural Policy. This sees around 70% of the total grant going to 20% of recipients including some multinational companies . In 2004 the UK contributed £4.6bn into the CAP pot and received £2.9bn back . The basic maths suggests enough slack for the current subsidy levels to continue, but much will depend on macro level economics and how this impacts the wider UK budget. Importantly, like most forms of EU support to the UK, any national replacement scheme needs to be judged against a historically declining benchmark of comparative EU funding” Rory asserts.

A future UK subsidy regime could be better suited to the needs of UK farming, although the implementation of CAP is already largely influenced at a UK regional level. This year has seen the Scottish Government apologise for significant delays in Single Farm Payments, despite investing £178m in a software system to manage payments. To date, they have also been fined £51m for non -compliance with other areas of CAP administration and the current late payments narrowly avoided further fines that were estimated to be as high as £125m . It is fair to suggest inefficiency is inherent in the CAP system, although all the frustrations with the system may not entirely lie with the EU.

Agricultural land has traditionally been a key long-term investment, however land prices may adjust to reflect any future falls in subsidy level. That said, land prices are subject to cycles and have always been viewed as a ‘safe’, long-term investment. Indeed, better quality farmland may benefit as a safe place to hold wealth during times of financial volatility. Agricultural land prices spiked during the 2008 economic crash and continued to grow throughout the recovery .

While farmers may not see the EU as their natural ally, EU farming policy is historically generous. Farmers represent 3% of the EU’s population yet they receive around 30% of the total EU budget. Rory summarises, “Left to the political will of the UK, I would suggest that future UK equivalents will be far more sensitive to the concepts of ‘land stewardship’ and ‘public benefit’. Diversification is often portrayed as ‘good money after bad’, but farmers may do well to consider viable ways of increasing alternative income streams or controlling more of the value chain. In the less viable regions, the alternative may well be to embrace future agri-environmental funding, which invariably promotes less intensive farming.”

Sources:
http://capreform.eu/agricultural-implications-of-british-eu-withdrawal-for-rest-of-the-eu/
Agra Europe report – Preparing for Brexit: What UK withdrawl from the EU would mean for the agri-food industry – quoted in the Guardian www.theguardian.com/world/2015/oct/24/britain-eu-exit-devastate-farmers-study
www.telegraph.co.uk/finance/economics/11967049/brexit-is-a-life-or-death-matter-for-britains-farmers.html
http://farmsubsidy.openspending.org
www.theguardian.com/uk/2005/dec/08/freedomofinformation.foodanddrink
www.yorkshirepost.co.uk/news/environment/the-value-of-farmland-reaches-a-record-high-1-5981374