50 shades of BREXIT

Well, the UK voters have had their “BREXIT election” and an unclear situation before the June 8 election in the UK has become even more unclear after the votes were counted. Indeed, what seemed to be a black and white decision by the UK electorate in a referendum twelve months ago has morphed into an increasing number of shades of grey ever since. Like a suicidal game of pass the parcel the politicians went to the electorate for a decision and the voters passed the decision back to them.

Hard BREXIT, soft BREXIT, open BREXIT, red, white and blue BREXIT, softer BREXIT, etc., etc.  – take your pick from any one of many slogans used by the commentators and politicos over the last year but don’t expect to get much help on how these soundbites will inform your business decisions. Everyone, even the experts, now agrees about one thing – we don’t have a clue as to where this is heading. It’s as if, sailing along, we knew there was stormy weather out there but we are not sure if it will come our way, how strong the wind and rain will be, and in which direction we should steer the boat (not to mention who should be the captain).  That’s the analogy I will use. At this confusing post-election moment, I will remind you of reports we reviewed in Whole Hog Issue 267 (April 2017) in order to prompt readers of where the BREXIT storm could hit the British pig industry and its value chain hardest.  This doesn’t tell us what will happen in the BREXIT negotiations but it gives us an insight of what could go badly wrong – and we may be able to take some prudent measures to prepare the boat for the worst possible storm that may come our way. In other words, let’s be gloomy and then get a pleasant surprise rather than be optimistic and bet the farm/factory on the best outcome possible. This is a survival strategy – how bad could things be?

Our April issue of Whole Hog Brief used material from the House of Lords (HoL) report on the impact of BREXIT on UK agriculture in order to illustrate the vulnerability of the British pig and pigmeat value chain to the “wrong” BREXIT outcome.  In brief, that vulnerability arises from higher costs (partly due to stringent welfare rules), dependence on imported vegetable protein, and the possibility of the re-imposition of tariffs/loss of protection against low cost imports, and the loss of markets in the EU.

Average final bound tariff rates applied by the EU by broad category of goods

Bound tariffsIn its evidence to the HoL the National Pig Association admitted that, “The level of protection afforded to the EU pig sector by import tariffs is significant … With pig production costs in the USA, Canada and Brazil considerably lower than in the UK (due to lower welfare, legislation and environment standards) the removal or reduction of tariffs for pork products from those countries will have a significant negative impact on British pork producers.” Furthermore, the HoL submission by the Agriculture Industries Confederation (AIC) noted that significant volumes of animal feed were imported from the EU or from non-EU countries through the EU. The AIC said, “the UK pig and poultry sectors in particular are very reliant on this imported vegetable protein, a quantity and quality which cannot be replicated domestically and both sectors would face massive risks if supplies were disrupted or their cost was increased”. Finally, in its Horizon report the AHDB noted that almost all pig meat imports into the EU, with the exception of offal, are subject to sizeable import tariffs. They range from €172 to €1,494 per tonne, depending on the cut. The high levels of tariffs effectively mean that most non-EU pork is uncompetitive on the EU market.

Balance of trade for UK pigmeat

Pork balance sheetTo summarise this evidence from the industry’s stakeholders, it seems that, whilst they are in the EU, UK producers of pigs and pigmeat are currently given relatively high levels of effective protection since lower cost imports from non-EU countries are restricted by tariffs on pigmeat and feed costs are lower by virtue of access to low-tariff supplies of cereals/zero tariff wheat/maize, and vegetable proteins in the UK/EU. Importantly, the Single Market provisions of the EU also help UK and EU producers make low cost decisions on how to allocate different types of pig and parts of the pig carcass to different parts of a market with c. 500 million consumers. Hence, apart from the self-imposed higher welfare rules for pig production since 2000, UK producers have operated on a broadly level playing field when competing with other EU producers. In fact, UK farmers and pigmeat processors have probably operated on a playing field tilted slightly in their favour since the more flexible labour laws in the UK are beneficial compared with their French, Danish, Dutch and German competitors. Clearly, any BREXIT outcome that changes these parameters could be a negative one for the UK pig industry.

In this summary we see what a “perfect storm BREXIT” might look like for the UK pig industry. The impact of a BREXIT deal which includes high tariffs on farm products is, potentially, a triple whammy. Large tariffs on pigmeat would nominally protect UK pig producers but would drive up their feed costs, raise consumer prices and limit the UK’s access to the EU market. Higher feed and equipment costs from a devalued pound will also hit profit margins. Further, the much touted “global trade” option for the UK (if outside the EU Customs Union) would not arrive quickly or without costs.  A free trade area (FTA) with non-EU countries would probably result in loss of protection via lower tariffs on food imports. And, to cap it all, controls on immigration mean less flexible labour laws on the farm and in the factory i.e. such controls increase costs in the supply chain. All of these potential changes make up the perfect storm that the HMS UK pig industry needs to avoid at all costs.

So, at the end of this Blog it seems that I have introduced another sort of BREXIT – a perfect storm. But it wasn’t my intention to offer another soundbite. The key message is that it’s more important to look at any BREXIT deal and consider its impact on the costs of inputs, consumer prices and market access for UK pigs and pigmeat. Hence, a BREXIT deal with no Customs Union or one without covering farm products could be disastrous – but equally might be OK if the details are thought through and applied correctly by the politicos. The same comment applies to immigration controls, FTAs, tariff changes, welfare regulations, etc.

In these uncertain times it’s important to look at the worst weather that could arrive and to be ready to batten down the hatches and wear your lifebelt.