Brexit and its consequences

There was a drumbeat in Europe when a majority of the UK voted in favour of leaving the European Union in June 2016. Two and a half years have passed since then and the negotiations on the exact procedure for leaving the European Union remain tough. One thing is certain: Brexit will have far-reaching consequences - also for agricultural industries throughout Europe and also in Germany!

Written by Friederike Scholten, Key Account Manager - AdHoc

Before 2016, it was unthinkable that a country would consciously leave the European community. With approximately 500 million people, the European Union (EU) is the largest economic area in the world. It ensures a free internal market for services, goods, capital, and labour. But when 51.9 percent of voters in the British referendum in 2016 voted in favour of leaving, the unthinkable became reality. A lot of time has passed since then, filled with negotiations and hopes that things might change in the end. But no matter what exactly will be achieved before the leaving date(1): Brexit is coming! And it will definitely have consequences for the island, for the European Union and for Germany, both in terms of agricultural production and trade of agricultural products.

Trade: Every year, the United Kingdom imports agricultural and food products worth around 50 billion Euros (meat, fruit, vegetables, dairy products) compared to agricultural exports of around 25 billion Euros. The share of German agricultural exports accounts for about ten percent of this (= 4.7 billion euros)(2). For Germany, this is around six percent of its exports. On the other hand, Germany imports products worth 1.6 billion Euros from the island. Germany currently has no other country with such a large agricultural trade surplus.(3)

Figure 1: Imports and exports Germany and Great Britain for agricultural and food products (2017) in billions of Euros (Source: Martin Banse und Florian Freund „Mögliche Auswirkungen eines Brexit auf den deutschen Agrarhandel“, Thünen Working Paper 70 (March 2017)).

These intra-European trade flows will change significantly as a result of Brexit, as free trade independent from the EU is one of the main intentions of the supporters of Brexit. The British hope is that their exit will make Britain economically more independent. Under certain circumstances, a "deal" (as an agreement with Brussels) will clarify that there are special regulations for the purpose of trade freedoms with the EU (= soft Brexit). But if Great Britain's exit ultimately takes place "without a deal", agricultural trade will be significantly impaired (= hard

Brexit): higher tariffs and new regulations (new standards in food safety) are likely. For the island, which will continue to depend on agricultural imports, supply will inevitably become more expensive and complicated.

For Germany, no matter whether there is a "soft" or "hard" Brexit, it is clear that the above-mentioned agricultural trade surplus will decline, as exports will fall much more sharply than imports. At present, a reduction of up to 50 percent is realistic (see chart). The poultry and pork industries will be affected the most.(4) However, this does not mean the end of the world: Germany can look for other trading partners, both within and outside the EU, so that there will ultimately be a trade diversion. But in general, agricultural markets are affected by Brexit, regardless of its exact shape. Agricultural prices are already sensitive during the negotiation phase; they will come under even more pressure once an outcome is reached. There are a number of possible scenarios. What they all have in common is that the agricultural products previously sold in Britain will put pressure on the European internal market, leading to a market imbalance. As a result, farmers' incomes will fall drastically.

Figure 2: After a calculation of the Thünen-Institute, source: Federal Institute for Agriculture and Food (BLE) *

Farming: Britain's exit from the EU has consequences for both German and British farmers: As mentioned above, Germany exports significantly more agricultural products to the island than it imports. The German farmers are thus at least partly dependent on the local sales of their products (above all meat products, milk products, fruit, vegetables). Due to rising export prices, German farmers inevitably fear for their competitiveness and ultimately their sales. A reorientation towards other markets is also a process that does not happen ad hoc.

For British farmers, on the other hand, a "no deal" Brexit would be a disaster, according to the British Farmers' Union (NFU).** The concrete consequences relate on the one hand to competitiveness after exit. Due to the possible trade restrictions shown above, it may well be that British farmers will no longer be able to offer their products at competitive prices, such as meat, which is still largely produced for the European market. In addition, producer prices will increase due to difficulties in the access to inputs (crop protection, fertilisers, etc.), which in turn will have an impact on consumer prices as well. On the other hand, support for the agricultural policy is uncertain. Direct payments may be reduced or even abolished. If the latter happens, this can have existential consequences. In addition, this is aggravated by the fact that after exit, immigration is to be significantly limited. In the British fields, however, mainly workers from Poland, Romania or Bulgaria work. It is also questionable who will be able to do this low-wage work in the future. According to the NFU, British farmers' confidence in the future has thus fallen to a new low. Around 1/5 of the farmers will significantly reduce their farm investments this year.*** An expansion of British agricultural production would even be unthinkable under these conditions.

 

Politics and Industry: The British exit will inevitably mean a cut in the EU budget.(5) On average, the remaining EU-27 would have three billion Euros less to spend each year, which in turn would have an impact on the Common Agricultural Policy (CAP). And the agricultural industry is already feeling the Brexit pinch: crop protection manufacturers with headquarters or subsidiaries in the UK, for example, are currently preparing for various scenarios. The expected custom barriers, in particular, are putting the industry in fear, as delays in the supply chain and difficulties with product approvals are possible.(6)

Negotiations are currently in full progress. All scenarios are still conceivable. It is also likely that the exit date will be postponed. It remains to be seen whether the precautionary measures demanded by the European agricultural and food industry associations will be implemented. So one thing is certain: it will remain exciting.

 

Please note: At editorial deadline, the UK is still under negotiation with the EU for a new exit date.

 

(1) The first leaving date, the 29th of March was postponed. Right now prime minister May is struggling with its own parliament as well the EU to find a suitable date for the Brexit.

(2) After the Netherlands, France, and Italy, Great Britain is the fourth largest export market for German agricultural products.

(3) With almost all other trading partners, Germany imports more agricultural goods than it exports.

(4) However, this is not the only sector. The dairy sector is also affected.

(5) GB is a "net contributor" to the EU. Deposits from the island exceed disbursements by about 7.7 billion euros.

(6) From now on, chemicals must be applied for in two systems.

Friederike Scholten
Key Account Manager
Friederike.Scholten@kleffmann.com
Tel:  +49 2591 9188 -133
Fax: +49 2591 9188 - 900