Agricultural food and drink sector - impact of future UK Free Trade Agreement scenarios: research

7. FTA Impact Assessments

This Chapter summarises the results of the CGE (MAGNET) modelling as regards the selected non-EU FTAs. It draws upon the inputs, particularly concerning trade barriers, presented in previous Chapters. Given the main focus of this study, section 7 assesses the impact of FTAs with the selected non-EU partners. These analyses are undertaken at a UK level as that is the basis on which the MAGNET modelling was conducted. Chapters 8 and 9 then look in detail at the impact of these FTAs on Scottish farming and the implications for the Scottish agri-food more generally.

7.1 FTA Impact Assessment by Sector

This section gives an overview of the projected impacts of the selected non-EU FTAs on each agri-food sector within scope. For each sector, findings from the MAGNET modelling are firstly set-out. Thereafter, primary research insights are also outlined for each sector. Additional commentary on what the results mean for the UK and Scottish agri-food and farming are provided in sections 8.3 and 8.4 respectively.

7.1.1 Wheat

MAGNET Modelling Findings

The impact of trade liberalisation on wheat exports is positive (see Table 6-4) which indicates a potential comparative advantage of the UK in trade with the selected non-EU partners (focus countries). Under the low-liberalisation scenario, total UK wheat exports could increase from £135 million in the Main Baseline to £150 million in the Low Liberalisation scenario and up to £165 million in the High Liberalisation counterpart. This represents percentage increases ranging from 11% - 22%.

Looking more closely at the situation with individual trading partners, the increase in global wheat exports is driven mostly by Canada, where total exports would rise by between 12% to 26%. On the other hand, an FTA with the GCC would lead to a moderate decline in the UK's global wheat exports (there are some substitution effects among the individual focus countries).

Table 7‑1: Long-Term Changes to Total UK Wheat Exports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Wheat Exports	135.6	149.8	+14.2	+10.5%	165.0	+29.4	+21.7%
Of which:
Australia			+1.2	+0.9%	Australia	+2.5	+1.8%
New Zealand (NZ)			+1.2	+0.9%	NZ	+2.4	+1.8%
Canada			+16.3	+12.0%	Canada	+35.7	+26.3%
GCC			-4.5	-3.3%	GCC	-11.1	-8.2%

Sources: Wageningen University and Research (WUR) and Andersons

Note: the changes listed for each FTA partner represent the change in total UK wheat exports (to all countries) as a result of the application of an FTA with the partner listed. For instance, a UK FTA with Australia would increase total UK exports by £1.2m in the Low Liberalisation, equating to 0.9% of Baseline UK wheat exports (£135.6m). Again, all values are quoted in real-terms (2019 prices).

Trade liberalisation also produces increased volumes of wheat imports. The magnitudes are substantially larger - imports would increase between 50% to 100% with the largest shipments coming from Canada. It is important to note that this substantial increase of trade volume, particularly of imports, owes to the elimination of import tariffs which are reinstalled in the Main Baseline due to Brexit. It also shows that Canada has a long-term competitive advantage in trade in wheat. With an enhanced FTA, it could play an important role as a supplier of wheat to the UK, even under a parallel increase of wheat exports from the UK. The fact that UK can increase both exports and imports can be explained by the heterogeneity of products in the aggregate commodity group. It can also be explained by the modelling approach which uses the Armington assumptions (i.e., there is no perfect substitution between domestic and imported good) which prevents a commodity only being supplied domestically or only traded externally.

Table 7‑2: Long-Term Changes to Total UK Wheat Imports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Wheat Imports	288.4	432.6	+114.2	+50.0%	597.5	+309.1	+107.2%
Of which:
Australia			+10.2	+3.5%	Australia	+22.6	7.8%
New Zealand (NZ)			-1.5	-0.5%	NZ	-3.6	-1.3%
Canada			+129.6	+44.9%	Canada	+274.4	95.1%
GCC			+5.9	+2.1%	GCC	+15.7	5.4%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Looking at the GVA, the impacts of FTAs on wheat production are moderately negative. Declines of between 2.7% and 5.9% are projected over the forecast period (2019-2037). This is due to increased imports of wheat and a possible substitution of domestically produced wheat by imported wheat in the UK's intermediate and final consumption.

Table 7‑3: Long-Term Changes to UK Wheat GVA Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Wheat GVA	2,107.1	2,051.3	-55.9	-2.7%	1,983.3	-123.9	-5.9%
Of which:
Australia			-3.8	-0.2%	Australia	-8.8	-0.4%
New Zealand (NZ)			+0.5	0.0%	NZ	+0.8	0.0%
Canada			-49.2	-2.3%	Canada	-106.5	-5.1%
GCC			-3.5	-0.2%	GCC	-9.5	-0.4%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Primary Research Findings:

• Imports: there is likely to be increased wheat imports from Canada arising from an enhanced FTA but the aggregated impacts of the selected FTAs will be limited according to industry experts. Canadian-based industry participants see increased wheat sales to the UK as a definite opportunity and believe that potential issues around GMOs can be overcome.
• Exports: given the UK and Scotland's relatively high-costs of production versus grain from the Black Sea (when it is available to ship), export opportunities to the GCC region are anticipated to be limited. Whilst Brexit has made exporting to the EU somewhat more difficult, it remains much easier to ship wheat to Germany where relationships and trust are well-established than to the Middle East where buyers are heavily price-focused and relationships are not as established.
• Prices: there is an acknowledgement amongst interviewees that Canadian wheat prices are more competitive than Scottish/UK prices for wheat of comparable quality. Although shipping costs have increased significantly, industry participants anticipate some downward price pressure. Whilst Australia also produces and exports wheat, industry experts believe its impact will be limited due to the distances involved.
• Output: the general consensus is that there would be very limited direct impacts on production arising from the FTAs. That said, the indirect impacts of new FTAs on beef, sheepmeat and dairy give some causes for concern.
• Short-term issues and concerns:
  • Input cost inflation and the associated pressures this places on working capital, cashflow and the availability of credit is the biggest short-term concern. Of course, this is primarily linked to the Russia-Ukraine conflict – an issue which is not within the scope of this study. Whilst output prices have also been rising, buyers are not committing to long-term purchases, which is making the prospects for 2023 challenging to predict.
  • Labour availability: is not seen as a major issue in the grain sector particularly when compared to more labour-intensive sectors like potatoes and fruit.
  • Brexit-related regulation: the just-in-time nature of supply chains has created challenges for importers arising from Brexit. Whilst regulatory certification per se is not expensive for grain, the ability to book a ship at short notice has become more problematic, particularly if it takes 48-72 hours to get a Country of Origin certificate and the density of wheat can mean that the weight of the grain when loaded is different to what is on the customs declaration. Overall, these issues are not deemed to be insurmountable but have created some supply-chain disruption.
  • Long-term issues and concerns: issues related to CO₂ emissions are becoming more important as processors are increasingly focused on how to achieve net-zero. This could create some scope for locally-produced wheat in the future, but the demand placed on farmers to lower their CO₂ emissions could also create further financial strain.

7.1.2 Barley

MAGNET Modelling Findings

Similar to wheat, the selected non-EU FTAs also produce an increased exports in "other grain" (which as explained in section 2.2 is used as a proxy for barley given that it is the main "other grain" being traded by the UK). In monetary terms, exports increase from £258 million in 2019 up to £280 million under a High Liberalisation scenario (Table 7‑4). This represents an increase of 8.4%. Next to Canada, other trading partners of potential importance to the UK's barley's exports are the GCC countries, with exports absolute increase of £9 million (+4%).

Table 7‑4: Long-Term Changes to Total UK Exports of Other Grain Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Other grain exports	258.1	269.1	+11.0	+4.3%	279.8	+21.7	+8.4%
Of which:
Australia			+0.3	+0.1%	Australia	+0.5	+0.2%
New Zealand (NZ)			+0.7	+0.3%	NZ	+1.4	+0.5%
Canada			+4.8	+1.9%	Canada	+9.9	+3.8%
GCC			+5.2	+2.0%	GCC	+9.9	+3.9%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Interestingly, in contrast to wheat, trade liberalisation does not lead to an increase of imports of other grain, the only exception being the GCC. This suggests that the focus countries do not specialise substantially on trading other grain with the UK. Thus, the UK could increase its net export position due to trade liberalisation.

Table 7‑5: Long-Term Changes to Total UK Imports of Other Grain Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Other grain imports	563.5	563.0	-0.5	-0.1%	561.0	-2.5	-0.4%
Of which:
Australia			+0.1	+0.0%	Australia	+0.2	+0.0%
New Zealand (NZ)			-0.8	-0.1%	NZ	-1.6	-0.3%
Canada			-4.2	-0.7%	Canada	-10.8	-1.9%
GCC			+4.4	+0.8%	GCC	+9.7	+1.7%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

In line with the developments in trade, other grain GVA would see an increase, ranging from £1.8 million £2.3 million over the forecast period; however, in relative terms, this is rather marginal (about 0.3%). The GCC countries would play the largest role in this GVA increase.

Table 7‑6: Long-Term Changes to UK Other Grain GVA Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Other grain GVA	760.2	762.0	+1.8	+0.2%	762.5	+2.3	+0.3%
Of which:
Australia			-0.1	-0.0	Australia	-0.4	+0.0
New Zealand (NZ)			+0.2	+0.0	NZ	+0.3	+0.0
Canada			-0.6	-0.1	Canada	-1.6	-0.2
GCC			+2.2	+0.3	GCC	+4.0	+0.5

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Primary Research Findings:

• Imports: the selected FTAs are unlikely to lead to any significant increases in barley imports. Where imports might arise will be for niche varieties of malting barley (e.g. from Scandinavia) which are required by the whisky distilling industry.
• Exports: given the high-value of Scotch whisky, any exportable surplus of Scottish malting barley is unlikely to be shipped overseas and will instead be used domestically. Therefore, direct barley exports are not expected to increase to a significant degree. That said, there might be small opportunities for UK exports of malt to increase to the likes of the GCC (e.g. UAE) but most of these opportunities would arise for maltsters in the South East of England.
• Prices: the feedback from industry experts is broadly similar to wheat insofar that the price impact of the FTAs would be limited, especially for Scottish barley due to the strong malting barley demand from whisky distilleries. Therefore, the future trajectory of prices will be heavily linked to the market opportunities for Scotch whisky sales both domestically and overseas.
• Output: significant investment in additional malting capacity is taking place in Scotland. One industry participant suggested a net 170Kt capacity increase in the coming years. This should have a positive impact on malting barley output. Within the feed sector, there are concerns (as with wheat) about the indirect impact of FTAs on demand for feed for grazing livestock. Overall, at a UK-level the impact on barley output as a result of the FTAs is anticipated to be limited.
• Short-term issues and concerns: are similar to those outlined above for wheat.
• Long-term issues and concerns: again, these are broadly similar to the points above for wheat although it is arguable that environmental issues are even more prevalent for whisky distilleries. In terms of CO₂ emissions, it is anticipated that these distilleries will be expected to achieve sizeable carbon offsets and this could create some pressure on land-use for farming in Scotland. The availability of peat which is crucial for processes used by several whisky distilleries is also a challenge given the environmental issues that arise through the harvesting of peat.

7.1.3 Dairy

MAGNET Modelling Findings

The MAGNET modelling forecasts that the UK's dairy sector would see the largest positive gains from trade liberalisation with the selected FTA partners. Total exports could increase from £1.22 billion to nearly £2.27 billion over the forecast period, i.e. an 86% increase (Table 7‑7). This substantial growth is particularly driven by increased exports to the GCC countries. However, Canada and Australia also contribute to this positive balance according to the MAGNET modelling. Putting this in the context of a relatively moderate increase in dairy imports (Table 7‑8), there is a clear comparative advantage of UK on the dairy market.

Table 7‑7: Long-Term Changes to Total UK Dairy Exports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Dairy Exports	1,217.8	1,560.0	+342.0	+28.1%	2,269.1	+1,051.3	+86.3%
Of which:
Australia			+54.2	+4.5%	Australia	+164.2	+13.5%
New Zealand (NZ)			+20.8	+1.7%	NZ	+66.4	+5.5%
Canada			+75.7	+6.2%	Canada	+220.7	+18.1%
GCC			+191.5	+15.7%	GCC	+599.9	+49.3%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Table 7‑8: Long-Term Changes to Total UK Dairy Imports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Dairy Imports	4,081.4	4,140.4	+58.9	+1.4%	4,248.7	+167.3	+4.1%
Of which:
Australia			+2.6	+0.1%	Australia	+8.6	+0.2%
New Zealand (NZ)			+28.9	+0.7%	NZ	+82.9	+2.0%
Canada			+2.0	+0.1%	Canada	+9.2	+0.2%
GCC			+25.4	+0.6%	GCC	+66.6	+1.6%
Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

The positive developments on the foreign markets are transmitted to an increased GVA in the UK dairy sector (see Table 7‑9). The projected increases range from £57 million (Low Liberalisation) to £170 million under the High Liberalisation scenario. The GCC countries would be the largest contributors to this increase. The impacts on the GVA in dairy are in lower magnitudes compared to the developments in trade, which suggests that there may be a reduction of supplies of dairy on domestic markets to compensate for the increase of supplies to foreign markets. The increased dairy imports from New Zealand in particular would also have a role to play in reduced UK supplies.

Table 7‑9: Long-Term Changes to UK Dairy GVA Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Dairy GVA	1,892.6	1,949.5	+56.9	+3.0%	2,062.9	+170.3	+9.0%
Of which:
Australia			+10.5	0.6%	Australia	+31.0	1.6%
New Zealand (NZ)			-3.8	-0.2%	NZ	-10.4	-0.6%
Canada			+15.7	0.8%	Canada	+43.9	2.3%
GCC			+34.5	1.8%	GCC	+105.8	5.6%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Primary Research Findings:

• Imports: most industry participants foresee some increased imports from NZ although there are varying views on the extent of this threat. Some perceive it to be relatively high in the long-term, particularly if geopolitical tensions with China hit export sales to Asia. However, other industry participants believe that environmental constraints will inhibit NZ dairy exports in the future. Environmental constraints are also a challenge for the Australian dairy industry and industry experts believe that these constraints will limit its ability to export to the UK to a few select niches.
• Exports: most industry participants agreed that the GCC region presents lucrative export opportunities. However, as one GCC-based participant emphasised, opportunities for high-end exports are limited to approximately 30% of the market in Saudi Arabia, Qatar and the UAE. The remaining 70% of the market (and this percentage will be higher in Oman) is very price-focused and will present limited opportunities. Accordingly, the consensus is that opportunities in the GCC region will need to be focused on high-end niches for products such as cheese and yoghurts, some of which will need to be air-freighted into the region.

Whilst Canada is seen by industry participants as a high-end market with a rising population, it is also highly protectionist. Therefore, in contrast to the MAGNET modelling industry experts believe that export opportunities for the UK are likely to be limited to some high-end niches. Industry participants would welcome an increased TRQ for dairy exports into Canada but noted that concessions to the EU were small in the CETA deal and minimal to the UK in the recent roll-over trade deal. The Canadian quota system is also notoriously complex and a few organisations exert a lot of control. Therefore, most see dairy export opportunities as being low.

• Prices: the FTAs with non-EU partners are not anticipated to have a major impact on dairy prices. This is partly because the UK liquid milk market is insulated from import competition to a large degree. That said, all interviewees noted the competitive threat posed by New Zealand and most think that this will create some downward price pressure. However, some noted that market opportunities for NZ dairy produce across Asia should limit this impact.
• Output: at a UK level, the volume of output is not anticipated to change that significantly as a result of new FTAs. What is more likely to happen is that the UK reorientates its production activities away from the less profitable lines (e.g. milk powder) and towards more lucrative segments such as cheese production. This should also present increased export opportunities. These increases are mainly coming from incremental investments on existing sites. From a Scottish perspective, the fact that a significant proportion of its milk output is processed in England will mean that the costs of transporting this milk southwards will have a major bearing on future Scottish milk output.
• Short-term issues and concerns:
  • NTM issues: were cited by several industry participants as being a key challenge in the GCC region. This is especially so with Qatar which has recently introduced stringent minimum and maximum shelf-life requirements which have effectively shut-out imports and protected its domestic sector. There are also NTM issues with Saudi Arabia which threatened to introduce similar restrictions as Qatar but pulled back when the EU protested. Some industry participants also cited issues with Saudi packaging requirements in the past and that these are likely to arise again in the future.
  • Labour and logistics costs: have hit parts of the dairy industry particularly in terms of the availability and cost of HGV drivers where costs have risen by up to 30%. Both the ending of Free Movement and the Covid-19 pandemic have been the key drivers of this increase. Whilst labour cost rises across the dairy industry are generally much less, it has created supply-chain pressures. Although most acknowledge that exposure to migrant labour is relatively limited in the Scottish dairy sector.
  • Other inflationary pressures: were also highlighted by dairy processors with most cost lines being exposed to inflation in recent months. At the farm-level, these effects are even more pronounced in some areas, particularly fertiliser and feed.
• Long-term issues and concerns: as with cereals, environmental sustainability issues are also becoming higher on the agenda in the dairy sector. Industry participants also mentioned the potential that could arise from longer-term trade deals with India (again within high-end niches) and as a result of the UK joining the CPTPP. Regarding the latter, one interviewee noted that although Australia and NZ are already CPTPP members, the UK will not be required to give additional concessions. However, the remaining CPTPP countries that the UK does not have a trade deal with are net importers and this should present long-term export opportunities.

7.1.4 Beef

MAGNET Modelling Findings

The impacts of the considered FTAs on beef exports are positive (see Table 7‑10), with the value of exports in 2037 projected to rise from £372 million in the Main Baseline to £437 million GBP in the Low Liberalisation scenario and £582 million under High Liberalisation. This represents a 17% to 57% increase depending on the Main Baseline. FTAs with Canada (£117 million) and the GCC countries (£82 million) would be the most important contributors to this increase in total beef exports, based on the MAGNET modelling. However, for the latter, as emphasised below in the primary research findings, increased exports to the GCC will be contingent on meeting Halal requirements. As explained below, this will be a challenge for the Scottish beef industry.

Table 7‑10: Long-Term Changes to Total UK Beef Exports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Beef Exports	372.1	436.3	+64.1	+17.2%	582.6	+210.5	+56.6%
Of which:
Australia			+2.3	0.6%	Australia	+7.0	1.9%
New Zealand (NZ)			+1.5	0.4%	NZ	+4.0	1.1%
Canada			+38.0	10.2%	Canada	+117.3	31.5%
GCC			+22.2	6.0%	GCC	+82.2	22.1%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

It is apparent that there is room not only to increase UK exports of beef but that beef imports into the UK could also rise (see Table 7‑14). The magnitude of the increases in imports (between +26% to + 61%) are comparable to those of exports presented in Table 7‑10. However, for imports, Australia and New Zealand are projected to lead in taking advantage of the liberalised UK beef market. In the case of Australia, UK's imports would increase by 48%, followed by New Zealand (+11%).

Table 7‑11: Long-Term Changes to Total UK Beef Imports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Beef Imports	1,098.3	1,388.8	+290.5	+26.4%	1,766.9	+668.6	+60.9%
Of which:
Australia			+228.1	+20.8%	Australia	+525.7	+47.9%
New Zealand (NZ)			+58.1	+5.3%	NZ	+131.0	+11.9%
Canada			+0.3	+0.0%	Canada	+1.8	+0.2%
GCC			+3.9	+0.4%	GCC	+10.0	+0.9%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

In terms of GVA, the resulting impacts on the beef processing industry (Table 7‑12) are moderately negative. GVA is projected to fall by around 3% in Low-Liberalisation scenario and by 6% under High Liberalisation. The largest contributor to this result would be Australia, due to increased imports of beef. Since the UK voted to leave the EU, Australia has been particularly keen in pursuing a trade deal and increased exports of Australian beef is seen as a key beneficiary.

Table 7‑12: Long-Term Changes to UK Beef GVA Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Beef GVA	3,044.9	2,958.7	-86.2	-2.8%	2,858.1	-186.8	-6.1%
Of which:
Australia			-86.7	-2.8%	Australia	-204.9	-6.7%
New Zealand (NZ)			-22.3	-0.7%	NZ	-51.5	-1.7%
Canada			+14.0	0.5%	Canada	+41.4	1.4%
GCC			+8.8	0.3%	GCC	+28.1	0.9%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Primary Research Findings:

• Imports: the additional scope for imports from Australia and NZ are most likely to supplant imports coming in from Ireland. That said, the scope for Irish exports to be sold elsewhere in the EU will be somewhat limited meaning that significant volumes of Irish beef will continue to be sold in the UK market.

Canada is also seen by some as posing some threat but much will depend on the standards that the UK agrees to with Canada as part of any enhanced trade deal. At present, if Canada wants to supply the UK its processors have to separate out non-hormone treated beef. This adds costs and limits the interest of Canadian in the UK market.

Overall, industry participants believe that the volume of UK beef imports will increase to some degree but the extent would be much less than if the UK did a trade deal with the US or Mercosur.

• Exports: following on from the previous points, if Irish beef has increased difficulties in finding outlets in the UK, some of this beef will be diverted towards the EU27. This is likely to encroach on existing UK and Scottish exports to the EU which are now also being impeded by NTMs. Industry participants believe that this will be the biggest export impact for beef.

Looking at the selected non-EU partners, Canada is seen by some as offering the most export opportunity, even if there is also an increased competitive threat of beef imports from Canada. In recent years, exports to Canada have been rising although recent hikes in shipping costs have impeded UK competitiveness. Therefore, any opportunities that do arise will be limited to high-end niches. Scotch beef should be well-positioned to avail of such opportunities given its strong international reputation.

On the face of it, some might think that the GCC also offers export opportunities to the UK; however, its Halal requirements are seen as a major barrier. This is particularly so because UK retailers place stringent requirements on UK meat plants which do not permit non-stun Halal slaughter of cattle. Markets such as Saudi Arabia and the UAE have a strict interpretation of Halal which necessitate non-stun Halal slaughter. As most Scottish and UK processors supply the UK retail sector, they do not want to get involved in non-stun Halal slaughter. Therefore, any export opportunities that do emerge will be restricted to processors that do not supply the retailing sector.

Therefore, there is a consensus that export opportunities for Scotch beef to the GCC will be low.

• Prices: most industry participants believe that, for beef, the impacts of the new FTAs on prices will be limited in the long-term, provided that there are no major changes in geopolitical relationships. Here, the potential for friction between Australia and China was cited as a concern. Several participants also highlighted that Australian and NZ beef prices are high presently and that the Asia-Pacific market is more attractive. That said, some believe that any increased imports from Australia and NZ will put pressure on prices particularly in Ireland and a lot will depend on how Irish supply (and exports to the UK) react to this.
• Output: from a trade perspective, the threat to long-term UK (and Scottish) beef output is considered to be low and that environmental issues are a much bigger challenge.
• Short-term issues and concerns:
  • NTM issues: as outlined above, Halal certification is the major impediment in the GCC region. Whilst Canada also has stringent SPS requirements, industry participants believe that Canadian authorities are more flexible and permit some checks to take place away from the border.
  • Labour and logistics costs: several industry participants cited the ending of Free Movement in January 2021 as having a significant impact on costs and the ability to attract staff. To some degree, this is also linked with Covid but the Brexit influence is significant.
  • Other inflationary pressures: as with the dairy sector, cost increases throughout the supply-chain have emerged which, if sustained, have the potential to further erode competitiveness.
• Long-term issues and concerns:
  • Environmental sustainability issues feature prominently given the extent of the GHG emissions challenge in the beef sector. This is particularly so when combined with the potential for land-use change arising from net-zero initiatives.
  • Support: the downward trajectory in support payments coupled with the struggling profitability in grazing livestock farming adds further to the beef sector's challenge according to industry experts.
  • Regulatory standards: although Australian and NZ standards have some differences to the UK, they are more aligned than the likes of Canada, the US and Brazil. If future trade deals lead to significant changes in what standards the UK is prepared to accept in the future then this could lead to a severe competitive challenge for UK and Scottish producers, particularly if farmers have to adhere to existing standards whilst imports, produced to a different standard, can enter the UK.
  • Lack of new entrants: is closely linked with poor profitability and is viewed by some as a major long-term threat to the beef industry.

7.1.5 Sheep

MAGNET Modelling Findings

As regards sheepmeat exports (see Table 7‑13), trade liberalisation with the focus countries also presents opportunities. In 2037, sheepmeat exports could increase from £449 million in the Main Baseline to £498 million in a Low Liberalisation scenario, with the potential to increase to £570 million under High Liberalisation. FTAs with each selected country would each have a positive contribution towards the increase in exports. In the High Liberalisation scenario, an FTA with New Zealand would increase exports by 10.7% based on the MAGNET modelling. Similar to the effect that an FTA with Canada has on wheat, an FTA with NZ will lead to increased imports (see Table 7‑14) and some of the sheepmeat previously sold domestically will be sold overseas as a result.

FTAs with Canada and the GCC are projected to increase UK lamb exports by 8% and 6.6% respectively. Further insights on these opportunities are provided in the primary research findings section below.

Table 7‑13: Long-Term Changes to Total UK Sheepmeat Exports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Sheepmeat Exports	449.1	498.3	+49.2	+10.9%	569.2	+120.1	+26.7%
Of which:
Australia			+4.0	+0.9%	Australia	+6.7	+1.5%
New Zealand (NZ)			+28.5	+6.3%	NZ	+48.1	+10.7%
Canada			+9.9	+2.2%	Canada	+35.7	+8.0%
GCC			+6.8	+1.5%	GCC	+29.5	+6.6%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

As alluded to above, trade liberalisation would lead to even more substantial increase in imports, ranging from 50% to 62% as shown in Table 7‑14. Australia and New Zealand would be the most significant contributors to this increase. This would have more notable consequences on the domestic production of sheepmeat (Table 7‑15) with a projected decline of gross value added of around 10%. This is primarily attributable to increased imports from New Zealand.

Table 7‑14: Long-Term Changes to Total UK Sheepmeat Imports Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Sheepmeat Imports	346.5	524.8	+178.3	+51.5%	561.0	+214.5	+61.9%
Of which:
Australia			+49.6	+14.3%	Australia	+71.6	+20.7%
New Zealand (NZ)			+127.4	+36.8%	NZ	+139.4	+40.2%
Canada			+0.2	+0.1%	Canada	+0.9	+0.3%
GCC			+1.0	+0.3%	GCC	+2.6	+0.7%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Table 7‑15: Long-Term Changes to Total UK Sheepmeat GVA Resulting from Selected FTAs

Parameter	Main Baseline (£m)	FTA (Low Lib) (£m)	Change (£m)	% Change	FTA (High Lib) (£m)	Change (£m)	% Change
Sheepmeat GVA	488.1	436.7	-51.4	-10.5%	433.8	-54.2	-11.1%
Of which:
Australia			-11.5	-2.4%	Australia	-17.8	-3.6%
New Zealand (NZ)			-45.5	-9.3%	NZ	-57.6	-11.8%
Canada			+3.4	+0.7%	Canada	+11.8	+2.4%
GCC			+2.2	+0.5%	GCC	+9.3	+1.9%

Sources: Wageningen University and Research (WUR) and Andersons

Note: all estimates are based on real-terms (2019) prices for the 2019 to 2037 forecast period.

Primary Research Findings:

• Imports: given that Australia and NZ are major sheepmeat exporters, there is a general consensus that imports into the UK will increase. This is especially so for Australia given that it currently has relatively low access to the UK presently via TRQs. For some participants, given the environmental constraints being placed on NZ lamb production coupled with the 114Kt existing TRQ, they believe that import pressure from NZ would be limited in tonnage terms. That said, others believe that NZ will focus on sending more higher value cuts to the UK and that this could have a significant long-term impact on the UK market. One participant stated that the nature of NZ imports had changed in recent decades from carcase-based, frozen lamb and nowadays, high-value legs of lamb and chilled imports are much more prevalent.

Taking each country individually, industry participants generally think that the competitive threat is at the low-to-medium level. However, taken together, some suggested that the threat level would be raised to medium. This, coupled with a long-term market crash and/or a geopolitical incident with China, would mean a high level of competitive threat to the UK.

• Exports: the EU market will remain crucial to the UK and whilst most industry participants think that increased exports to selected non-EU markets will be helpful, some suggest that these markets will be largely incidental.

Canada is perceived to offer a strong opportunity for the UK, particularly Eastern Canada. Canada is not well-suited to producing lamb and the cultural links with Scotland and the UK more generally should help to build a stronger presence in the market. Some suggest that there may even be opportunities for the UK and NZ to work together to supply year-round spring lamb to the Canadian (and US) markets.

The GCC is also seen as an opportunity but there are significant Halal-related issues that must be overcome. As mentioned in section 4.3.4, the Demonstration of Life Protocol being put forward by the AHDB is seen by some as a key means to gain traction in the GCC market as it would be much more acceptable to UK retailers who ultimately remain the key customers for Scotch and UK lamb. As with dairy, the key will be to get traction in the higher end of the GCC market as there is also a substantial low-end, low-priced market segment that the UK (Scotland) should not be competing in. Industry participants also anticipate strong competition with Australia and NZ if the UK seeks to exploit the GCC market. Therefore, overall industry experts believe whilst some opportunities can emerge in the GCC they will be relatively small.

To build exports over the long-term, there were calls for greater investment in a Scotch lamb label because currently there is much greater interest in Scotch beef given its international reputation. Some believe that if there could be a greater emphasis on the sustainability credentials of Scotch lamb that this could be important in building market share overseas.

• Prices: whilst the recent downturns in global sheep production has influenced the strong prices of late, some industry participants believe that any notable uptick in sheep production could signify a significant threat, especially in the UK as trade deals with Australia and NZ are applied. Whilst sheep industry participants acknowledge that Australia and NZ are both heavily focused on Asia, some believe that there will be efforts to send more product to the UK. On balance, will exert a downward influence on prices
• Output: arising from the increased imports and associated price pressures, most industry participants believe that there will be a downward trend on sheepmeat production. That said, a number of interviewees believe that other factors, particularly associated with tree-planting and land use change will exert more influence, especially in Scotland.
• Short-term issues and concerns: are very similar to beef in that inflationary pressures on labour and other inputs are prevalent. NTM issues are also similar to beef insofar that Halal certification is a key issue for the GCC, but is more surmountable than beef as the Demonstration of Life Protocol only applies to small animals. Again, the SPS requirements in Canada are similar to those for beef.
• Long-term issues and concerns:
  • Environmental sustainability the pressures brought about by land-use change in Scotland, specifically in terms of tree planting, are viewed as being an even more potent challenge for sheep (versus beef) given the number of sheep grazed in the upland areas of Scotland. A number of industry participants are concerned about the long-term prospects for sheep numbers in Scotland as a result. One interviewee stated that hill farmers who are about to retire are all going into tree-planting. This in turn is breaks down the Scottish system where upland breeds go to the lowland and this all means that there will be lower volumes of lamb available. Whilst it is acknowledged that regenerative farming could help sheep numbers in some areas, it is a partial mitigation at best.
  • Lack of new entrants: was also highlighted regarding sheep, particularly in the uplands as alluded to in the previous point. Poor profitability is also influential and some see these pressures as the greatest long-term threat to the sheep industry.
  • Support: given the struggling profitability, commitments to long-term support are seen as crucial by many industry participants.

7.1.6 Potatoes

Whilst the MAGNET CGE Model is comprehensive, it contains insufficient data on the potatoes' sector to permit an analysis similar to that which has been conducted for the other sectors. This is especially so in terms of seed potatoes which are highly important in Scotland. Accordingly, the analysis presented in this study is predicated on an MS-Excel based analysis at the farm-level which is set-out in section 8.4.4.

The remainder of this section focuses on insights from industry experts on the likely impacts of the selected non-EU FTAs on Scottish and UK potatoes. The key points are;

• Brexit effects: the UK-EU TCA has made potatoes generally more difficult to ship. This is due to customs costs and phytosanitary regulations in particular. Added to this, shipping costs have increased markedly since 2020. In terms of the general supply of potatoes, there was a small crop in 2020 and looks like an even smaller crop in 2022, so the market will be tight. Therefore, more of the supply will stay in the UK in the short-term.

For 2021, there is evidence that seed potato plantings were lower due to UK seed potato exports to the EU becoming ineligible for trade. Most industry participants, including those in the EU, agree that UK-EU trade should continue and that the barriers now in place are there for political reasons. That said, Defra has permitted the imports of seed potatoes into England from the EU, so some import trade continues. However, one industry expert suggested that this is an added headwind for the industry when the EU has not reciprocated in permitting UK exports in the opposite direction.

Therefore, in comparison with other sectors, the impact of the UK-EU TCA on the seed potatoes sector has been significant and is set to remain so in the short- to medium-term.

• Non-EU FTA opportunities: are generally perceived to be limited with respect to the four selected partners examined in this study.
  • Australia and NZ: Given the distances involved, UK FTAs with Australia and New Zealand are anticipated to have minimal impact on Scottish seed potatoes farming.
  • Canada: One prominent industry participant thought that export opportunities to Canada will be limited. This is because Canadian growers are already struggling to export to the US due to disease issues and, in such circumstances, it is highly unlikely that the Canadian Government would permit a significant increase in competitive pressure from Scottish exports. Therefore, this interviewee thought that export opportunities for Scotland would not amount to much.
  • GCC: exports of Scottish seed potatoes have historically taken place to the likes of Saudi Arabia. As Table 5-2 shows, there are minimal tariffs for seed potatoes into the GCC region, so any additional export opportunities would be predicated on reducing non-tariff measures. Climate is also a big issue in the GCC region as potatoes struggle to grow at temperatures surpassing 30^oC.

  In the short- to medium-term much will depend on Egypt's relationship with Russia which has been a big export market for Egypt. If Egyptian exports to Russia struggle due to the conflict and associated sanctions, then the Gulf region would become a key target market for Egypt. This would obviously curtail opportunities for Scottish seed potato exports. Industry feedback suggests that opportunities for potatoes generally in the GCC region would be low and limited to a few selected niches that would not make a significant difference to Scottish potato production.

• Other opportunities: interviewees believed that the US would offer greater potential for Scottish seed potatoes in the longer-term and that export opportunities for high-quality seed potatoes are also likely to exist in the likes of India, East and West Africa. Africa is seen as having notable potential as potato consumption is quite high and geographically Scotland is quite well-positioned to serve some markets, particularly in West Africa.
• Cost pressures: were highlighted in a number of discussions.
  • Labour: Whilst there is more automation in the picking of potatoes, significant labour is still required for potatoes' grading and the ending of Free Movement has led to labour cost increases.
  • Other inputs: current inflationary pressures on the UK economy have affected most cost lines for potatoes, but particularly in terms of fertiliser, energy and packaging. Some suggest that farmers are struggling to get the price increases needed to cover these costs and accordingly margins are suffering.

7.2 Concluding Remarks

The summary of the projected changes in prices, vis-à-vis the Main Baseline, as a result of the FTA scenarios is provided in Table 7-16. It shows UK agri-food prices for the selected commodities are projected to fall due to the flow-on effect of liberalised trade. The strongest decline is expected for wheat (potentially -2.8%). For the other commodities, with the exception of dairy, price decreases of around -1% or less are projected. In general, trade liberalisation would lead to a higher openness and the UK would see increased volumes of both exports and imports in most of the focus commodities versus the Main Baseline. Given the GVA increases in dairy, particularly under the High Liberalisation scenario, it is unsurprising to see some price increases, albeit small.

Table 7‑16: Aggregated Long-Term Impact of FTAs on UK Market Prices (£ per Tonne)

Sector	FTA Low Liberalisation	FTA High Liberalisation
Wheat	-1.4%	-2.8%
Barley	-0.4%	-0.6%
Dairy	0.0%	0.2%
Beef	-0.1%	-0.2%
Sheepmeat	-0.8%	-1.0%

Sources: Wageningen University and Research (WUR) and Andersons

From a more broader perspective and considering the developments in the aggregate agri-food sector, it is found that trade liberalisation with Canada, Australia, New Zealand and the GCC countries has positive impacts on trade. That said, the prices and GVA estimates presented above suggest that whilst there will be opportunities in some sectors (most notably dairying), it will signify significant headwinds for others, particularly grazing livestock.