Farmers are just bystanders

Brexit changes everything
Brexit changes everything

As a one time economist, admittedly a long time ago, I am well used to the comments on their forecasting accuracy.

The best is probably that they exist to give astrologers credibility. But comments like these miss the point that economic forecasts depend on the assumptions made. Some are simply better than others, and the recent research on the market impact of Brexit by AFBI is certainly on that list. The assumptions it makes are realistic, but the forecast is still based on economic theory rather than the real world and the inevitable impact of politics.

The days when economics relied on number crunching possible outcomes have given way to the use of economic models. This means that for any given analysis more outcomes can be assessed at the press of a button. That is the basis of the AFBI report, which used a joint US/UK modelling system, known as FAPRI-UK. The research looked at three possible Brexit outcomes, and their potential impact on UK farming, in terms of end product prices for farmers.

The three alternatives were some form of sweetheart deal between the UK and the EU-27 to give it continuing access to the single market. This is what most people expected would happen after Brexit. This was before the government made clear it was leaving the customs union and would not accept any deal that maintained free movement of people. For agriculture this would have the least impact. Prices would be reduced across all commodities by a maximum of three per cent. This is based on higher compliance costs, because outside the CAP the UK would have to prove it was fully meeting EU-27 standards. Attractive as this may be, especially for lamb which depends on the European market, it ignores the reality of politics and European opposition to any special deal for the UK.

Another option considered was a unilateral declaration of free trade by the UK government. This would allow all countries access to the UK on a tariff free basis, in the hope that they would reciprocate and do the same for UK products. This is the option many on the eurosceptic wing of the Conservative party would like to see pursued. This would be the worst possible outcome for the farming industry. It would devastate UK farm prices, with reductions of up to 45 per cent for beef, 30 per cent for lamb and ten per cent plus for other enterprises. This is because imports would surge from low cost production areas in South America and the southern hemisphere. Without a massive increase in support, far above anything the CAP ever delivered, this would leave UK agriculture in an impossible financial position. Fortunately this remains the least likely of the three options.

The third alternative needs to come with a large flashing light warning that it is not all it appears to be. That is the concept of trading on the basis of World Trade Organisation most favoured nation (MFN) standards. This would increase prices for most farm products, other than lamb, which depends on exports to Europe and would face big tariffs. This, in theory, would work well for farmers because the UK is a net importer of food. The cost would rise, because of tariffs, meaning farm returns could rise dramatically in the UK.

That sounds great in theory, but before embracing this as a solution people need to ask whether they really believe the government would allow a huge rise in prices on supermarket shelves. This would be seen by people as evidence that Brexit has failed to deliver for them. Instead the government would almost certainly change the tariff rules to allow in food at lower rates, potentially leaving farmers no better off, but facing an export mountain to climb. It also needs to be remembered that this is a UK analysis, and that Northern Ireland is more vulnerable to export tariffs on dairy products in particular.

Farmers are bystanders in this political game, but the outcome will decide the prosperity or otherwise of their businesses after Brexit in 2019. Politicians can debate how long the transitional arrangements will last, but in a long term business like agriculture it does not really matter whether those last one or five years. The long term challenge remains a sound basis upon which the industry can trade. While support arrangements are important, it is the market that will ultimately decide whether Brexit succeeds.