British agriculture will see fundamental change after the UK leaves the EU for one simple reason. Currently all agriculture policy is subject to the Common Agricultural Policy (CAP) which is one of only two common EU policies (along with fisheries). As a result, once outside the EU, the UK will not be bound by the CAP. It is very unlikely that the UK will be part of the single market in agricultural and food products either. No non EU country has this access, not even Switzerland or Norway, which have full single market access in all other areas.
This provides a number of challenges and opportunities for the UK which can be broken down into broadly three categories:
1. What will a British Agricultural Policy (BAP) look like?
2. What sort of access will the UK get to EU markets?
3. What will the position of agriculture be in regards to trade deals with third countries?
Let's look at each of these three categories in more detail.
What will a future British Agricultural Policy (BAP) look like?
Currently UK farming receives around £3 billion per year in direct payments from the EU and an additional £400 for rural development programmes. It is highly unlikely that any UK government would match that level of funding long term. In fact in the last three EU CAP reform rounds, the UK government's position has been to abolish direct payments altogether and the three main parties have all argued the same for many years. All have supported moving more money into the Rural Development part of the CAP.
However, every major economy in the world subsidises farming. With nearly half of UK farm income currently coming from EU payments, the UK government will need to fund farming. Yet, it is highly unlikely that UK farming will receive anywhere near the current level of support, given both the financial realities and traditional government view of direct payments to farmers.
So the first reality will be that there is less finance available. However, the CAP has often been accused of wasting money or not directing it towards the farmers most in need of support, so a smaller budget does not necessarily translate into less effective support for farmers.
If we look at the CAP as a starting point, until the 2013 CAP reform, direct payments to farmers took the form of a single payment. The single farm payment was a per hectare payment and therefore based on the land, not on what was produced. Since 2014 this was split up into a basic payment, which did the same thing as the SFP and an additional greening payment if farmers met certain greening obligations. In addition, there was the option for national governments to pay specific coupled payments to certain sectors based on production; however England never took up this part of the scheme, although Scotland did. The direct payment was topped up by rural development schemes which allowed farmers to receive additional funding if they signed up for various agri-environmental schemes.
UK governments have always been very keen on these agri-environmental schemes but have lacked the funding to truly deliver them on a large scale because the UK always got a very poor rural development funding allocation from the EU. However, given general UK government support for these schemes, and a public view of farming which tends to be moving more towards payment for the delivery of "public goods" (i.e. high environmental & animal welfare standards), there is a distinct likelihood that a future PAB moves increasingly towards this area.
In the 2012 Fresh Start Project, http://www.eufreshstart.co.uk/3%20CAP-%20Fresh%20Start%20Green%20Paper.pdf, which was directed by the current DEFRA secretary of State Andrea Leadsom, and had significant input from current farm minister George Eustice, the chapter on Agriculture included an intriguing proposal. The proposal was that allowances should be linked to extra environmental standards, but that a farmer could sell those allowances onto another farmer if he/she wasn't prepared to meet those environmental standards, but another farmer was. In the Fresh Start paper, it ended up in the rural development section, but only because under EU rules, it couldn't be done in direct payments. However, outside of the CAP, there is a good possibility that the government may go down this line. This has the advantage of allowing those farmers who are able and willing to meet the extra standards to benefit from it, whilst freeing up the farmers who can't meet the extra standards to sell directly to the market. I suspect there is a distinct possibility that the government will develop a system of this type.
In addition, it is clear that some farming sectors are more in need of support than others. Livestock farms, with their fixed costs, heavy feed costs and high overheads which means they can't easily react quickly to market changes probably have a good case for significant support. There are some arable farms, but not all, which could be confident of prospering without a payment at all.
All major industrial nations spend significant amounts of money on agricultural support. There are a variety of models, from the old fashioned EU production based subsidies, to the more recent focus on per area payments, to counter cyclical insurance types of support which only pay when the price drops below a certain level, which have been used in the US. Overall agricultural support is a tricky area, where significant competing interests need to be balanced. In addition, support needs to remain within WTO rules. Compliance with the WTO rules led to the most significant EU CAP reforms in the early 2000's and started the shift from production based to area based subsidies. However, within these constraints the government has significant scope to mould a new and twenty first century support system.
What sort of access will the UK get to EU Markets?
This is a challenging one, because even under the "stay in the single market" option, Agriculture is excluded. No non EU country has access to the EU single market in agricultural goods without paying tariffs. Chiefly this is because the CAP is a substantial state aid, which provides over 40% of the income for many farms yet in international trade terms, significantly distorts the market. All other major markets put tariffs on European agricultural products as a result. To not do so would be opening up your market to highly subsidised imports which would overwhelm domestic production. Therefore the UK, which will not spend £3 billion a year on farm payments post Brexit, will have to put tariffs on some, sensitive agricultural products from Europe and this will mean that Europe will respond with tariffs on our products. Livestock products are the most likely ones to face such tariffs. This could be a serious headache for the UK as we export significant amounts of agricultural products to the EU. 40% of all lamb and mutton production is exported to the EU for example, which accounts for 97% of all our exports of these products. Tariffs can range from relatively little to very punitive tariffs.
However, even after tariffs are taken into account, it is not guaranteed that the UK will get access to EU markets in all agricultural sectors. After the BSE outbreak the French continued to ban British beef on a unilateral basis even after the EU had lifted the ban. It took the threat of legal action by the European Commission to finally force the French to let British beef in again. The European Commission has also been worried about the number of animal diseases in the UK. Foot and Mouth outbreaks and the current challenges with Bovine TB have both left the Commission nervous and trying to deflect requests from other European countries to ban British livestock products. Especially after a British calf infected Dutch cattle after being exported to the Netherlands a few years ago.
Even if all these can be overcome, there is still a significant risk that the UK will not be able to get full access to European markets, especially if the UK embraces (as the government suggests it will) Genetically Modified crops (GMO's), or if the UK reintroduces any of the pesticides which have been banned recently by the European Union. The EU has banned most GMO crops for many years, even though they are grown all over the rest of the world. In addition, many pesticides are due to be banned soon under the REACH directive and the EU has taken a hazard based approach to pesticides in general, meaning many are banned. UK farming organisations and the UK government are united in opposition to many of the EU imposed bans and it is very likely that some of these will be reintroduced after Brexit. If that is the case, then it is very likely that the EU will seek to ban products produced with these chemicals or with GMOs.
What will be the position of Agriculture in future trade deals with third countries?
Agriculture has a challenging position with regards to future international trade deals. The UK agricultural sector is relatively small in comparison to other parts of the economy and the UK's major offensive interests in trade agreements will be to get access for services and manufacturing exports. In addition, many of the countries the UK will look to do free trade deals with outside of the EU are big agricultural producers such as Australia, the USA, Brazil, Argentina, Australia, and New Zealand. Most of these countries have been unhappy for some time about the lack of access they have been able to get into the EU market up to now. So agricultural industries face significant challenges when these deals are being negotiated as there is a danger that agricultural interests will be put to one side in order to gain enhanced access for services and manufacturing exports.
In addition, many of these countries engage in the widespread use of GMOs and plant protection products which are not approved in the EU, and different animal hygiene provisions. Therefore if the UK does diverge from the EU policies in these areas, it will make it much harder to keep products out from third countries. Whilst this is not, in general terms a bad thing, it will pose challenges for agricultural industries because they have built their production around the existing regulations which often make them uncompetitive against imports from abroad. In fact this has been a key justification for CAP payments and trade protectionism in the past. Whilst some EU rules, particularly those surrounding GMOs and pesticides are often overly restrictive, some, particularly those regarding animal hygiene and health have often contributed to UK products being seen as of high quality.
For example at the moment EU chicken is banned in the USA and US chicken is banned in the EU. Chickens produced on both sides of the Atlantic are perfectly safe, however the US uses a chlorine cleaning system for their chicken at the end of the production chain, whilst the EU doesn't allow the use of chlorine but instead uses a water wash system which cleans chickens at each stage of the production process. The end result is that in the EU there are more cases of salmonella and food poisoning from chicken and in the US there is the possibility that the widespread use of chlorine may be carcinogenic. So the EU bans US chicken and the US bans EU chickens. The EU places concerns of possible cancer causing chlorine ahead of food poisoning concerns whilst the US judges food poisoning to be more of a risk than a potential chlorine link to cancer. Completely different production chains have built up as a result on both sides of the Atlantic and despite several attempts between the EU and US to find a path through this impasse, neither side is prepared to give up their standards, which they perceive are higher than the other side.
If the UK gave up the EU system and took over the US system, which is much cheaper to operate, the end result would be that the US standards would effectively become UK standards and UK poultry farms would probably have to switch to the US production system to remain competitive.
This does give UK agriculture a possible strong hand in trade negotiations though. UK consumers are used to the EU system, they trust British produced food and generally believe it to be of high quality. Many are concerned about chlorinated chicken or hormone treated beef. It is unlikely therefore that the government would open the door to these methods in trade deals. What is much more likely is that the UK gives third countries much higher quotas for quality products. For example in beef that hasn't been treated with hormones but which meets EU standards. Currently this is known as the Hilton quota for high quality beef but this type of principle could be extended to other sectors for countries which agree to meet these standards.
The other possible strong hand for UK agriculture is that there are many products which British consumers want, but which can't, for climatic reasons, be produced in the UK. Sugar cane and citrus fruits are good examples and as many of the countries we will be negotiating trade deals with in the future are situated in Tropical or Mediterranean climatic zones, the UK could be clever here and offer significant access for these products, whilst offering a much more limited access for products which could be produced in the UK, and insist that those meet high quality standards.
There is no doubt that agriculture is vulnerable in future trade deals. Access for sheep meat is a key demand of both the Australians and New Zealanders. Mexico and Brazil both want to export significantly more sugar cane to the UK but can't under existing EU rules and Brazil, a powerhouse in livestock production, will make access for beef a key demand in any trade negotiations. However, there is room for the UK to be clever here and offer agricultural access which complements rather than threatens UK domestic production. There are also huge potential export opportunities for UK producers in future trade deals. UK production is seen as being of very high quality and there is demand for our products in the rest of the world. High quality British beef, which is still currently banned by the US, could be opened up by a trade deal with the US, access to the Japanese market could be very valuable for our producers, as could access to the Chinese market, where there is huge demand for skimmed milk powder.
So, overall Brexit poses major challenges for UK agriculture. However, although there are challenges, there are also opportunities. We now have the chance to create a new agricultural policy from scratch, without any of the historical baggage of the CAP or of previous policies. This will be the opportunity to shape British farming for the next generation and ensure that it is globally competitive as well as environmentally, socially and economically sustainable. The CAP was failing on all of those fronts. In addition, the CAP had got so complicated that the paperwork required to administer it was proving to be a major source of annoyance, both for farmers and for the government agencies trying to administer it. The rules surrounding production, especially those on plant protection products and on animal health can also be better suited to the UK environment, even though our room for manoeuvre there may be small given the need to continue exporting to the EU market. There are also opportunities for agriculture in future trade agreements which can be developed.
Agriculture will be one of the industries most changed and challenged by Brexit, yet it is also one that provides a blank sheet from which to start. It is rare that a country is given that opportunity, to devise both a trade and an agricultural policy from scratch. Both consumers and farmers will be watching it closely to see how it develops.