Brexit - agricultural sectors: analysis of impacts

9. Conclusions and Final Remarks

This study shows that the potential impacts of Brexit on Scottish farming are complex and require a nuanced analysis. Especially concerning a No Deal where there are divergent ramifications for different sectors. With this in mind, the study's key conclusions are set-out below.

9.1 Key Conclusions

1. An FTA results in relatively small changes to output: as shown in Table 9‑1 a UK-EU FTA would lead to relatively minor changes to Scottish agricultural output, as there would only be small effects on trade with the EU and UK consumption.Any changes that do occur are primarily due to NTMs. The NTM AVEs calculated in this project tend to be lower than previous studies and are predicated on the UK's standards being the same as the EU's. This leads to lower checking rates by regulatory authorities. Any future divergences in standards are likely to bring about increased checking rates by customs authorities and lead to increases in NTM costs.

2. A No Deal will lead to more dramatic and divergent effects on output: much will depend on whether the UK is a net exporter or net importer. For sectors reliant on exports (e.g. lamb and barley, which are important in Scotland), significant declines are forecast due to severe price reductions, especially lamb. Where the UK is a net importer (e.g. beef and dairy) output is projected to rise markedly (14-17%). For wheat, where the net trade position is more marginal, a small output increase is forecast but this is chiefly due to the relative decline of profitability in barley production. As it was not possible to undertake a full-scale modelling analysis for the horticultural sectors using Agmemod, the projected changes in Table 9-1 are due to trade barriers, including tariffs under a No Deal. Aside from seed potatoes (-4.6%), all other sectors are projected to grow by over 5% under No Deal. However, as discussed below, this is heavily reliant on sufficient labour availability.

3. Overall output projected higher in both Brexit scenarios: across all the sectors examined in this study, output is forecast to rise by 4.1% under No Deal, whereas the increase in an FTA scenario is just 0.6%. 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 2.4%, mainly driven by further declines in the sheepmeat and barley sectors.

Sources: Andersons, WUR and Scottish Government

* Not modelled using Agmemod, estimates based on tariff and NTM price changes applied to 2017-19 output.

4. 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 countries, most notably the US, Australia and New Zealand, 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. Although the imposition of a new 196Kt TRQ for beef did not diminish output under a No Deal scenario, this was in a large part due to this TRQ simply replicating the existing net trade position with the EU. 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 means greater exposure to world market prices and an erosion of prices, thus lowering output considerably. This would be most prevalent in beef but likely to have some effects on dairy products as well.

5. Minimal consumption changes in an FTA, but some reactions to No Deal price effects: the biggest consumer reaction occurs with lamb where No Deal price declines (26-27%) leads to a significant (35-37%) upturn in domestic usage. This reaction is also aided by the fact that substitute meat products such as beef, pork and poultry 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 reaction in lamb is also a function of the relatively small amounts currently consumed in the UK as it equates to about a fifth of beef consumption and a tenth of poultry meat domestic usage.

6. Divergent impacts on farm-level profitability: 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 a No Deal, the situation on LFA cattle and sheep farms deteriorates rapidly 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.

7. Inflationary pressures on inputs: 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. With tight industry profit margins, it is likely that much of the additional costs will be passed on to consumers and/or farmers. As demonstrated above, the degree to which Scottish farming 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.

8. If seasonal labour is unavailable, many horticultural enterprises will become unviable: the results in Chapter 8 suggest that if Free Movement ends and seasonal labour costs rise by 15-20%, horticultural profit margins decline considerably. However, more fundamentally, primary research feedback states that without seasonal labour, many enterprises will simply be unable to operate with obvious severe ramifications for the Scottish horticultural industry. It is evident that an expanded Seasonal Agricultural Workers' Scheme is required. 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.

9. Labour needs in food processing also need addressing: this issue is most prevalent in red meat where there is a heavy reliance on migrant labour. Whilst most workers will be in a position to achieve Settled Status, there will be challenges in recruiting new workers. Getting skills such as butchery onto the Shortage Occupation List has helped somewhat as has a relaxing of the salary thresholds. However, significant challenges remain and industry needs greater certainty on this issue which has increased in importance versus other Brexit issues in the last 1-2 years.

10. Uncertainty about future border arrangements: despite a significant increase in announcements recently from Defra and other Government agencies, many businesses are still uncertain as to what additional regulatory requirements will be placed upon them post-Brexit. This is particularly the case for trade into Northern Ireland where border controls are set to be in place from January, but is also an issue elsewhere, especially Dover-Calais. Detail is urgently needed on these arrangements and the general view is that although the Transition Period might end in December, a further 6 months is needed to phase in future arrangements. If these issues are not addressed, then significant upheaval will ensue in the first few months of 2021. This is likely to result in severe delays and will lead to a more substantial impact of NTMs. This would damage continental customers' confidence in being able to reliably source UK and Scottish produce, particularly perishable meat products. This would erode trust which, once lost, would be difficult to gain back.

11. Non-EU markets are not going to sufficiently replace EU export markets: this is because the UK/Scotland is a high-quality (and high-cost) producer, so opportunities for meat and dairy products are likely to be limited to niche markets such as Japan. This will not replace the significant value of exports to key EU markets if these are lost under a No Deal scenario. 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.

12. The UK Internal Market is still the most important for Scotland: this point was emphasised numerous times during the primary research. Several mentioned that Brexit should present opportunities to serve a greater proportion of the UK market, although this was likely to 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 UK will use agriculture as a pawn in trade negotiations and that the protection offered by the UKGT (which most participants welcomed) will be undermined when the UK signs new FTAs with the likes of Australia, New Zealand, the US or even Mercosur. This is coupled with fears 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.

13. Disproportionate impact on SMEs: smaller businesses are likely to have higher operating costs and dispatch fewer loads than their largescale peers. Due to the time burden involved with getting Special Economic Authorisations such as AEO status, which have not really been taken-up by SMEs, such firms are likely to be seen as a higher risk by regulatory authorities. Therefore, they would be subject to additional checks which would exert a higher toll as their risk would be spread across fewer loads on a yearly basis. As such, trade barriers would have a greater impact on their bottom-lines, meaning that it is more likely that such businesses would stop trading internationally. If alternative markets cannot be found domestically, they could exit the industry. In future, this could mean less competition and reduced choice.

9.2 Final Remarks

Scottish farming stands on the cusp of the most significant change in generations. Coupled with the impact of coronavirus, the challenge of climate change and net-zero as well as potential changes in agricultural support in 2025, the 2020's are set to become the "transition decade" for Scottish agriculture. 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 improved upon in the years ahead. If there is No Trade Deal, whilst the results show that there will be positive impacts, these are highly uncertain, and are likely to be eroded by future trade deals. Given the negative impacts in sheep and barley, which are much more important in Scotland than the UK generally, the viability of many Scottish farm businesses will be jeopardised under a No Deal. This will have severe ramifications for regions heavily reliant on these sectors.

Whilst trade with the EU is undoubtedly important, the UK internal market remains the most crucial for Scottish producers. Any divergence in standards within the UK would also cause upheaval. It is crucial that the future standards that operate within each devolved region are predicated upon an agreed baseline which gives Scottish farmers the chance to compete on a level playing field, both internally within the UK and with their peers in the EU. If such standards are formulated intelligently, they could also help to safeguard the high-quality reputation and integrity of Scottish agri-food produce. This will be crucial in protecting existing sales and capturing high-end opportunities more globally in future.

Although Brexit brings uncertainty, the Scottish agricultural industry has experienced significant crises in the past. However, the situation is complicated by the fact that it is navigating through another crisis with Covid-19. Farmers and the agri-food industry generally have the ability to adapt provided the playing field is fair. Irrespective of the political aspects of Brexit, which this study has sought to avoid, there is merit in a close collaborative partnership between like-minded economies, be that within the UK, the European continent, on a transatlantic basis, or more globally. This is especially so for countries that have worked together for decades and have come through numerous crises in the past.

Globally, the agricultural sector has more to gain by working together to address and overcome the challenges ahead (e.g. climate change, biodiversity crisis, feeding a planet of 9-10 billion people). Bumps along the road, of which Brexit is certainly one, will occur. These can only be overcome through collaboration, respect and due regard for the rule of law.