As the date of the referendum (June 23) to decide whether the UK will continue its membership in the EU fast approaches, the vast majority of industries are trying to ascertain what impact a victory for the leave campaign would have on their market structure. Food production is no different
The possible implications of a Brexit could entail alterations to regulation and many other aspects of the industry such as employment laws, but the most tangible modifications will likely be felt in the terms of trade.
The National Farmers’ Union (NFU) has attempted to quantify the effect on trade that the three most plausible scenarios - in the union’s opinion - would have on the industry.
These three possibilities are:
- A free trade agreement with the EU, similar to the Canadian model
- Implementation of World Trade Organisation (WTO) default arrangements
- Trade liberalisation
Two of the three outcomes proposed would see food prices rise: a free-trade agreement with the EU and the implementation of WTO default arrangements are forecast to raise prices by 5% and 8% respectively.
The former is an arrangement along the lines of the one Canada trades by with the EU and is an option that has been suggested by Boris Johnson, who is seen as one of the figureheads for the leave campaign. This scenario would, if these predictions prove accurate, be more favourable than the WTO deal. Both these scenarios seem to support the rationale for farmers to leave the EU, while a third scenario of trade liberalisation shows the potential for significant price reductions.
EU prices are currently well above those on world markets which, according to the NFU, is largely due to the average duty rate the 28-member body applies to agricultural imports from outside the trading bloc being 12.2%. However, this figure is slightly misleading and can vary significantly for certain produce, with cheese and wine imports levied at 30-40% and some meats as much as 70-90%. The impact of lower tariffs could see the price British farmers get for their beef fall by approximately 15%, while poultry prices decline by 7%. By the fundamental laws of economics this would likely see production in these foods fall, therefore decreasing the UK’s levels of agricultural self-sufficiency.
Furthermore, and perhaps the greatest determining factor with regards to the impact on farmers’ wellbeing if the UK were to sever its existing relationship with the EU, is that the current level of direct subsidies may come under increased downward pressure. Direct subsidies are a key component of many farmers’ business models, with an average farm receiving between €17,000 and €36,000 a year. The threat of a removal of this, which would leave a sizeable hole in their pockets, may be reason enough to swing some to vote to remain with the status quo.
David Cheetham is a market analyst with forex broker xtb.com