World Grain Report - Brexit delivered but will pulling out really work?

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Brexit delivered but will pulling out really work?

After almost five decades as a member of the powerful European Union (EU) trading bloc, Britain has struck out on its lonesome. At 23:00 Greenwich Mean Time (GMT) last Friday, January 31 2020, Prime Minister Boris Johnson delivered Brexit to the third-largest economy in Europe.

It is almost four years since 17.4 million British voters opted for Brexit in the EU Referendum, giving the ‘Leave’ side a decisive, but divisive, 52 per cent of the vote. Four painful and profoundly uncertain years have ensued, stifling the economy and unsettling investors.

The United Kingdom (UK) has now entered an 11-month transition period during which Johnson must finalise new trade deals with the country’s most important economic partners. During this phase, which ends on December 31 2020, the UK will continue to adhere to all of the EU's rules and its trading relationship will remain the same.

This transition period, which some prefer to call the implementation period, comes at a critical time for the British economy, which grew in 2019 at its slowest annual rate in almost a decade. Failure to strike a deal with Brussels would mean significant new trade barriers. This would be a disaster for economic growth and could push Britain into recession.

Agriculture's importance to the UK economy is emphasised by the fact that it has 149,000 farm businesses. That’s more than the number of businesses involved in the motor trade, in education, in finance and in insurance. The farming sector contributes more than £120 billion (AU$237 billion) to the economy and employs over 4 million people.

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However, food self-sufficiency has been declining steadily for more than 35 years since it peaked at 78 per cent in 1984. That figure was down to 61 per cent in 2018, and the downward trend is forecast to continue.

In mid-January, the UK government tabled radical changes to £3 billion (AU$5.9 billion) a year in agricultural spending that will focus the money on benefits to ecosystems, the climate and the public. The UK’s food security is to be regularly assessed by parliament to ensure minimal disruption to supplies while new trade deals are sought.

The UK’s new Agriculture Bill has been called “one of the most significant pieces of legislation for farmers in England for over 70 years”. It has the potential to affect the livelihoods of more than 460,000 people and determine the future of the 70 per cent of the UK land area (17.4 million hectares) currently under agricultural management.

At the bill’s core is a swing away from direct payments to farmers based upon the area of agricultural land they manage. This was a feature of the EU’s Common Agricultural Policy (CAP) that was widely criticised as it pushed up land values, creating an entry barrier for younger farmers, and benefited large landowners disproportionately.

Instead, landowners will in future be paid to produce “public goods”. These are things that can benefit everyone but bring no financial reward to those who produce them, like clean air and water. Over the next seven years, farmers will move from the CAP regulations to a new system of environmental land management contracts. These will detail the terms and conditions under which farmers and land managers will receive funding.

New initiatives include a stronger emphasis on the soil, at risk from misuse, erosion and nutrient loss; farmers are to receive help maintaining healthier soils, as well as with improvements to the tracking of livestock movements between farms. There will also be new powers to regulate fertiliser use and organic farming.

One of the biggest questions facing Johnson's Conservative Party is the type of relationship it wants with the EU. The trading bloc currently purchases almost 50 per cent of UK exports, and from which the UK purchases more than 50% of its imports. More than 25 per cent of Britain's food comes from the 27 other EU member countries, and less than 20 per cent comes from non-EU nations.

Another critical test for the Johnson government will be negotiating a trade deal with the United States, which already has a trade surplus with the UK. If past performance is an accurate indicator of future intentions, President Trump is highly unlikely to agree to anything significant without expecting a lot in return. If the UK resists US demands, then concluding a free trade agreement could take years.

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In the case of Australia, the UK currently accounts for approximately 1.5 per cent of Australian agricultural exports, and it seems unlikely that even in the post-Brexit era, this will increase to any significant degree. Nevertheless, the UK's dependence on agricultural imports from the EU will likely be reduced due to trade barriers, and this will open up opportunities for nations such as Australia to increase agricultural exports to the UK.

The Australian Government has said that it is focused on preserving and promoting Australia's strategic and economic interests with both the EU and UK during, and beyond, the transition period. It is working to address any risks posed by Brexit and is looking at ways to maximise opportunities with the EU and UK, including Australia-United Kingdom and Australia-EU Free Trade Agreements.

It is the latter, however, that has the most potential to deliver significant outcomes for Australian agriculture, especially if a reduction, or removal, of the existing tariffs and quotas on Australian agricultural exports can be negotiated. While that has been dismissed by seasoned EU negotiators, some additional market access may be possible.

Meanwhile, big questions remain around how the EU will approach the next 11 months in terms of agricultural trade with the UK. After producing a huge crop for the 2019/20 marketing year, UK wheat and barley traded at export parity to ensure they were competitive with continental markets.

The start of the 2019/20 marketing season saw the UK export grain at a significant rate to mitigate political uncertainty around Brexit, but exports slowed substantially in the last quarter of 2019. As a result, Britain is still carrying a sizeable grain surplus, but its marketing options are diminishing, and the coronavirus has spooked international markets.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

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