Brexit - agricultural sectors: analysis of impacts

Executive Summary

With the UK leaving the EU and the end of the Transition Period in December 2020, there will be significant impacts on all sectors of the Scottish economy, especially agriculture. This study has quantified the impact of Brexit on selected Scottish agricultural sectors namely: cereals (wheat and barley); livestock (dairy, beef and sheep); and horticulture (potatoes, cauliflower/broccoli and strawberries). This has been done using two scenarios, a Free Trade Agreement (FTA) and a No Trade Deal (No Deal) versus the Baseline of the UK continuing as an EU Member State. The research has been undertaken using a combination of Agmemod, a partial equilibrium economic model, desk-based research and industry interviews.

Assessments were also undertaken on the impact of tariffs, non-tariff measures (NTMs) and tariff rate quotas (TRQs) on future UK-EU trade patterns. These served as inputs to the Agmemod modelling which was undertaken with support from Wageningen University and Research (WUR) to assess Brexit impacts on wheat, barley, beef, sheepmeat and the dairy sector. These modelling results were then used in conjunction with additional analyses on horticulture to ascertain the impact of Brexit on UK and Scottish agricultural output and farm-level performance in Scotland.

Overall Results

• Relatively small impacts in an FTA but substantial changes projected in a No Deal: as Tables A and B show, a UK-EU FTA would lead to minor changes in Scottish output, even in the longer term. Under a No Deal, the impacts are much more substantial and lasting. The degree of impact in each sector under a No Deal depends on the UK's net trade position.
  • Export reliant sectors: such as barley, sheepmeat and seed potatoes (all important in Scotland), are projected to see a decline in the value of output. For barley and sheepmeat, such declines would be substantial, projected at 10-29% respectively in the short-term and 17-36% in the long-term.
  • Import dependent sectors: where the UK is a net importer, such as dairy (liquid milk) and beef, sizeable increases in the value of output are projected over the long-term, ranging from 14-19% respectively. For horticulture, aside from seed potatoes, the other sectors tend to be dominated by imports and are projected to grow by over 5% under No Deal. However, as outlined below, this is heavily contingent on sufficient labour availability.
  • Wheat: as its net trade position is more marginal, a small output increase is projected, chiefly due to the relative decline of profitability in barley production.

Table A: Agmemod Projections of Brexit Impacts on Selected Scottish Farm Sectors (£m)

Sector / Commodity	2017-19 Base	FTA 2021		FTA 2025		No Deal 2021		No Deal 2025
	£m	£m	% Ch	£m	% Ch	£m	% Ch	£m	% Ch
Wheat	121	121	0.0%	121	0.0%	123	2.0%	127	5.3%
Barley	269	269	0.0%	269	0.0%	241	-10.3%	222	-17.4%
Beef	575	581	1.1%	582	1.3%	672	16.9%	683	18.8%
Sheepmeat	213	215	1.0%	216	1.2%	152	-28.5%	137	-35.8%
Liquid Milk	384	386	0.6%	386	0.6%	440	14.6%	439	14.3%
Sub-Total	1,562	1,573	0.7%	1,574	0.8%	1,629	4.3%	1,608	2.9%

Sources: Andersons, WUR and Scottish Government

Table B: Short-Term Impacts of Brexit on Selected Scottish Horticultural Enterprises

Sector / Commodity	2017-19 Base	FTA 2021		No Deal 2021
	£m	£m	% Ch	£m	% Ch
Seed Potatoes*	76	75	-1.9%	73	-4.6%
Potatoes – Ware*	146	147	0.6%	155	5.9%
Cauliflower*	6	6	1.6%	6	5.6%
Broccoli*	10	10	1.6%	11	5.6%
Strawberries*	95	95	0.2%	100	5.3%
Sub-Total	333	333	0.0%	345	3.6%

Sources: Andersons, WUR and Scottish Government

* Note: Horticultural enterprises were not modelled using Agmemod, estimates are for 2021 only based on tariff and NTM price changes applied to 2017-19 output.

• Overall Output rises in both Brexit scenarios in the short-run and long-term: across all sectors examined in this study, output is forecast to rise marginally (by 0.6%) in an FTA scenario and by 4.1% under No Deal, These shifts, particularly in the FTA scenario, are well within the ranges witnessed in previous years just from weather, commodity and exchange rate shifts. For the sectors modelled via Agmemod, the short-term rise from a No Deal is 4.3% (vs 0.7% (FTA)). In 2025, No Deal gains dissipate somewhat to 2.9%, mainly driven by further declines in the sheepmeat and barley sectors.
• FTAs with third countries or generous new TRQs will erode output gains: although this study did not specifically model the impact additional FTAs which the UK might agree with other non-EU countries, it is evident that any additional exposure to global competitors whose cost bases are lower and operate to different standards, will exert pressure on Scottish producers. Importantly, it was also assumed that the UK's existing standards (i.e. aligned with the EU's) were still in place. As such, there were still linkages with the EU market. Changed standards as a result of new FTAs would mean greater exposure to world market prices and an erosion of domestic prices, lowering output considerably. This would be most prevalent in beef but likely to have some effects on dairy products as well. Furthermore, if the UK introduces generous new TRQs (i.e. of a quantity greater than the UK's net imports with the EU), then Scottish producers will face greater competition from world markets and domestic output would reduce significantly as a result.

Other Key Findings from Economic Modelling:

• Changes in an FTA scenario are primarily due to Non-Tariff Measure (NTM) costs: The NTM costs, to the sector as a whole, estimated in this project are summarised in Table C. The ranges in each scenario encompass both EU27 to UK and UK to EU27 trade. These NTM costs tend to be lower than previous studies. This is partly because the NTM estimates are predicated on the UK's standards being the same as the EU's. Therefore, the costs of obtaining regulatory approval from the EU Commission (at both the country and plant levels) have not been included as it is anticipated that such approval will be given initially, even under a No Deal scenario. Furthermore, the physical check rates for some products (e.g. beef) under a No Deal are set to decrease from 20% (used in some previous studies^[1],[2]) to 15%. Although in specific cases such as loads being subject to the full range of physical checks, AVEs often surpass 25% in a No Deal scenario. Any future divergences in standards between the UK and the EU are likely to lead to increases in NTM costs as such products will be subject to greater more scrutiny by both customs (HMRC) and authorities focusing on Sanitary and Phytosanitary (SPS) issues.

Table C: Average Cost to the Sector of NTMs by Commodity (Ad-Valorem Equivalent %)

Sector / Commodity	FTA	No Deal
Wheat	0.1%	0.1%
Barley	0.1%	0.1%
Beef (carcases only)	1.2 – 2.9%	2.2 – 5.0%
Sheepmeat (carcases only)	0.9 – 2.0%	1.8 – 3.4%
Dairy - Butter	0.8 – 1.1%	1.5 – 1.8%
Dairy - Cheese	1.1 – 1.7%	1.9 – 2.7%
Seed Potatoes	2.1 – 5.6%	3.0 – 7.1%
Potatoes – Ware	1.3 – 5.3%	1.7 – 7.2%
Cauliflower / Broccoli	2.1 – 2.3%	2.9 – 3.2%
Strawberries	0.4 -0.8%	0.6 – 1.1%

Sources: The Andersons Centre

• Limited UK access to EU markets via TRQs would continue under a No Deal: this should permit UK wheat exports to continue (albeit with a €12/t in-quota tariff which will inhibit competitiveness on EU markets) as the UK will be competing with other third countries to get access to the EU27 market via TRQs. Some exports of beef would also continue but such UK exports would be subject to conditions (e.g. would have to be frozen) and 'in-quota' tariffs. However, access for sheepmeat would be negligible. Table D summarises the access that UK exporters would have to the EU via TRQs and also sets-out the access that EU27 exports to the UK would have in a No Deal scenario. A new TRQ for UK beef imports (196Kt) is assumed under a No Deal scenario. This reflects the net trade position on UK-EU trade but would be available to all third countries which can meet the UK's standards. Therefore, EU27 producers would have to compete with non-EU countries. However, as imported volumes would be limited, it would safeguard UK domestic producers to a significant degree. That said, if the UK were to announce substantially different TRQ's there would likely be substantial impacts on the results for the beef, and dairy sectors in particular.
• Minimal consumption changes in an FTA, but some reactions to No Deal price effects: whilst the prices used in Agmemod relate to the farm-level, it permits some inferences to be made about consumer reactions to Brexit-related shocks. The results suggest that the biggest consumer reaction occurs with lamb where the No Deal farm gate price projected by Agmemod declines (26-27%) leads to a significant (35-36%) upturn in domestic usage. This reaction is also aided by consumers switching away from other meat products such as beef, pork and poultry which would become more expensive under No Deal. Beef and dairy products post relatively small consumption declines in reaction to No Deal price increases. The pronounced lamb reaction is also due to relatively low UK consumption which currently equates to about a fifth of beef consumption and a tenth of poultry meat domestic usage.

Table D: Potential Access for UK Exports to the EU and EU Exports to the UK under TRQs

Commodity	Available to Imports from EU27	Available to UK Exports to EU27	In-Quota Tariff (For Imports & Exports)	EU Common External Tariff
Based on allocation of existing EU28 TRQs (which will also be accessible by other Third Countries)
Wheat (all types)	85,935	2,715,242	€12/t	€95/t (feed)
Feed barley	293	306,812	€12/t	€93/t
Malting barley	30,101	20,789	€8/t	€93/t
Skimmed-milk powder	0	68,537	€475/t	€1,254
Butter	27,516	47,177	€948/t	€1,896/t
Cheddar cheese	64	14,941	€210/t	€1,671/t
Beef & Beef Offal	55,098	64,280	4 – 20%+ (frozen only)	12.8%+€1,768 (carcase beef)
Sheepmeat*	22	378	0%	12.8%+€1,713 (lamb carcases)
Potatoes (fresh) (Supplied Jan-Jun)	3	4,295	3%	9.6%
New UK TRQ* (No Deal scenario only)
Beef	196,000	0	0%	12.8%+€1,768 (carcase beef)

Source: European Commission

* Note: this new UK TRQ has been assumed under the core No Deal scenario (and does not apply in the FTA scenario). It reflects the UK's net trade position with the EU but would be available on an 'Erga Omnes' basis (i.e. to all third countries (EU and Non-EU) meeting the UK's standards.

• Impacts on farm-level profitability: Table E shows the short-term profitability impacts under both scenarios (i.e. longer-term 'responses' by farmers are not factored into consideration). Given the Agmemod results above, it is unsurprising that dairy and beef farming become more profitable under both scenarios. In an FTA where declines in sheepmeat prices are small, margins in both LFA and Lowland farms improve. Under No Deal, margins on LFA cattle and sheep farms deteriorate markedly due to price falls in sheepmeat. Lowland farms continue to see improved margins but that is heavily reliant on beef prices remaining high. Margins on Scottish cereals farms deteriorate under both scenarios due to the impacts on barley, where significant losses are projected under a No Deal.

Table E: Impact of Brexit Scenarios on Farm Business Income Excluding Diversification

Sector	18/19 (Base)	FTA (2021)	% Ch.	No Deal (2021)	% Ch.
Cereals	45,600	44,000	-3.6%	36,400	-20.1%
Dairy	70,700	71,400	1.0%	124,300	75.7%
LFA Cattle & Sheep	23,200	23,600	1.7%	17,600	-24.2%
Lowland Cattle & Sheep	9,600	10,100	5.6%	15,200	59.2%

Sources: Scottish Farm Business Survey, Andersons

Note: Figures are rounded to the nearest £100

• Inflationary pressures will rise for imported inputs from the EU27: trade barriers will exert inflationary pressures, particularly on farm-level inputs as it takes time for supply-chains to adapt to regulatory changes. Provision has been made for increases in input costs in the farm-level modelling. With tight industry profit margins, it is likely that much of the additional costs will be passed on to consumers and/or farmers. The degree to which Scottish farms could absorb such costs is limited. If farmers bear the brunt of price pressures, a significant proportion could be squeezed out of farming under a No Deal, especially in sheep and barley production.
• Labour: if Free Movement ends and seasonal labour costs rise by 15% (or more), then margins in the horticultural sector are projected to fall considerably. The ending of Free Movement will also affect other farm sectors but as labour costs tend to account for a lower proportion of overall production costs, such increases are less noticeable.

Additional Primary Research Findings

Whilst the main thrust of this report focused on economic modelling, several notable points also emerged from the primary research which are briefly summarised as follows;

• If seasonal labour is unavailable, many horticultural enterprises will become unviable: several interviewees stated that without seasonal labour, many horticultural enterprises will simply be unable to operate. Several emphasised the need for an expanded Seasonal Agricultural Workers' Scheme. Across the UK, this needs to be in the region of 70,000 workers, with over 9,250 seasonal workers needed in Scottish horticulture alone.
• Uncertainty about future border arrangements: remains amongst many businesses, despite recent announcements by Defra and other Government agencies, especially for trade into Northern Ireland where border controls are set to be in place from January. There are also concerns elsewhere, especially on the Dover-Calais route. Issues include whether products such as chilled mince and sausages will be permitted for cross-border trade and whether the various customs systems (e.g. Goods Vehicle Movement Service (GVMS)) are adequately tested. Interviewees emphasise that detail is urgently needed from the UK Government on these arrangements. The general view is that although the Transition Period might end in December, a further 6 month phase-in period is needed. If these issues are not addressed, then significant upheaval will ensue in the first few months of 2021 and could result in the loss of key markets for perishable produce particularly.
• Non-EU markets insufficient to replace EU export markets: as Scotland is a high-quality (and high-cost) producer, most industry experts believe opportunities for meat and dairy products are likely to be limited to niche markets such as Japan. They believe that this will not replace the significant value of exports to key EU markets if these are lost under No Deal. Taking sheepmeat for instance, around 95% of UK exports are to the EU. Under a No Deal exports are projected to fall by around 46% in the long-term. Given the time required to build new markets, distances involved and the competition from countries such as New Zealand, increased exports to these markets will not compensate for the loss of sales to the EU27. The industry view is that non-EU markets are bonus opportunities, but that safeguarding Scotland's share of the UK market and exports to the EU need to be prioritised.
• The importance of the UK Internal Market: was emphasised numerous times during the primary research. Several interviewees mentioned that Brexit should present opportunities to serve a greater proportion of the UK market, but this would be marginal in an FTA scenario. A No Deal would present greater opportunities for Scottish producers to increase sales in the UK Internal Market where Britain is a net importer. However, there are fears that the protection offered by the UKGT (which most participants operating in sectors reliant on imports welcomed) will be undermined as and when the UK signs new FTAs. For sectors reliant on exports (e.g. sheepmeat) any imposition of tariff barriers on UK-EU trade raises major concerns given the corrosive impact such tariffs would have on output.
• Coping with divergences in agri-food standards will be a delicate balancing act: several interviewees expressed concern that future changes to standards will make it more difficult for Scottish producers to compete, thus limiting domestic market opportunities even further. Some also expressed the view that Scotland should not simply follow EU standards if this meant that its competitive position in the rest of the UK was undermined. This suggests that there is an important balancing act for the Scottish Government to ensure that current standards and reputation of Scottish produce is upheld whilst not undermining its position in both the British and EU markets.
• Disproportionate impact on SMEs: which tend to have higher operating costs and dispatch fewer loads than their largescale peers. As such, the risks posed by trade barriers would have a greater impact on their bottom-lines, meaning that it is more likely that such businesses would stop trading internationally. In some cases, this could have a major impact on their competitiveness and viability.

Final Remarks

Scottish farming stands on the cusp of the most significant change in generations. As the Brexit Transition Period ends, there will be significant changes to Scotland's trading relationship with the EU (and NI). These can be minimised via an FTA and an alignment on standards between the UK and the EU, which is by far the largest overseas market for British produce. If there is No Trade Deal, some sectors might benefit but such gains are highly uncertain, and likely to be eroded by future trade deals and divergences in standards between the UK and the EU as well as within the UK internal market. Given the negative impacts in sheep and barley, which are of much importance in Scotland, the viability of many Scottish farm businesses, and several rural regions, will be jeopardised under a No Deal.

List of Tables

Table A: Agmemod Projections of Brexit Impacts on Selected Scottish Farm Sectors (£m)

Table B: Short-Term Estimated Impacts of Brexit on Selected Scottish Horticultural Enterprises

Table C: Average Cost to the Sector of NTMs by Commodity (Ad-Valorem Equivalent (AVE) %)

Table D: Potential Access for UK Exports to the EU and EU Exports to the UK under TRQs

Table E: Impact of Brexit Scenarios on Farm Business Income Excluding Diversification

Table 3‑1: AHDB: Assumptions and Results of Brexit Implication for Scotland

Table 3‑2: SRUC: Assumptions and Results of 'Assessing the Impacts of Alternative Post-Brexit Trade and Agricultural Support Policies on Scottish Farming Systems'

Table 3‑3: Summary Overview of the Division of EU28 TRQs between the UK and the EU27

Table 4‑1: Overview of Scottish and UK Agricultural Output – Selected Categories – 2017-19

Table 4‑2: Overview of UK Agricultural Production, Trade and Usage (2017-19)

Table 4‑3: Estimated Breakdown of UK Production by Geographic Market

Table 4‑4: Estimated Breakdown of UK Consumption by Geographic Source

Table 4‑5: Estimated Breakdown of Scottish Agricultural Sales by Geographic Market (2017-19)

Table 5‑1 – Price per tonne and estimated Tariffs for UK Cereals Imports – 2017-19 (AVE%)

Table 5‑2: Estimated Tariffs on UK Cereals and Cereal Exports to the EU27 – 2017-19 (AVE %)

Table 5‑3 – Proposed Division of Selected EU28 Cereals Import TRQs between EU27 and UK

Table 5‑4: Estimated NTM Costs to the Sector- Selected Cereals & Cereal Products (AVE %)

Table 5‑5: Projected UK Wheat and Barley Brexit Impact by Scenario (% Change vs Baseline)

Table 5‑6 – Projected Impact of Brexit on Scottish Cereals Farming (£/Farm)

Table 6‑1: Estimated Tariffs for UK Imports of Dairy Products – 2017-19 (AVE%)

Table 6‑2: Estimated Tariffs on UK Dairy Product Exports to the EU27 – 2017-19 (AVE %)

Table 6‑3: Proposed Division of Selected EU28 Dairy Import TRQs between EU27 and UK

Table 6‑4: Estimated NTM Costs - Selected Dairy Products for UK-EU Trade (AVE %)

Table 6‑5: Projected UK Dairy Output by Brexit Scenario

Table 6‑6: Projected Impact of Brexit Scenarios on Scottish Dairy Farms

Table 7‑1 – Impact of UK Tariffs (in AVE terms) on Imported Trade for Selected Commodities

Table 7‑2 – Impact of EU Common External Tariff (in AVE terms) on UK Exports

Table 7‑3 – Comparison of EU Beef Products TRQs Available to UK versus UK Exports to EU

Table 7‑4 – Proposed Division of EU28 Sheepmeat Import TRQs between EU27 and UK

Table 7‑5: NTM AVEs for Selected Beef and Sheep Products for UK-EU Trade (Probability-Based)

Table 7‑6: Projected Brexit Impacts by Scenario on UK Beef and Sheepmeat (% Change vs Base)

Table 7‑7: Projected Impact of Brexit Scenarios on LFA Scottish Beef & Sheep (£/Farm)

Table 7‑8: Projected Impact of Brexit Scenarios on Lowland Scottish Beef & Sheep (£/Farm)

Table 8‑1: Estimated Tariffs for UK Imports of Horticultural Products – 2017-19 (AVE%)

Table 8‑2: Estimated Tariffs on UK Horticultural Exports to the EU27 – 2017-19 (AVE %)

Table 8‑3: Proposed Division of Selected EU28 Potatoes' Import TRQs between EU27 and UK

Table 8‑4: Estimated NTM Costs - Selected Horticultural Products for UK-EU Trade (AVE %)

Table 8‑5: Estimated Number of Seasonal Workers in Scottish and UK Horticulture (2017)

Table 8‑6: Projected Brexit Impact Analysis - Scottish Seed Potatoes- High Performing (£ / Ha)

Table 8‑7: Projected Brexit Impact Analysis - Scottish Cauliflower Enterprise (£ per Hectare)

Table 8‑8: Projected Brexit Impact Analysis - Scottish Broccoli Enterprise (£ per Hectare)

Table 8‑9: Projected Brexit Impact Analysis - Scottish Strawberries Enterprise (£ per Hectare)

Table 9‑1: Estimated Short-Term Impact of Brexit on Selected Scottish Farm Sectors (£m)