Gauging Brexit's impact on grain trading

by Arvin Donley
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The AHDB said imposition of tariffs could have a particular impact on businesses processing cereals and oilseeds for export to the E.U.
With exports of United Kingdom agricultural commodities valued at ₤6.25 billion a year, the U.K.’s agricultural sector is trying to gauge the impact Brexit (Britain’s decision earlier this year to leave the E.U.) will have on the country’s grain trading relationships.

A paper titled “What might Brexit mean for U.K. agricultural products?” published in October by the Agriculture and Horticulture Development Board (AHDB), concluded that while it’s difficult at this point to identify the specific opportunities that Brexit presents to U.K. agriculture, the specific threats are more readily apparent.

“Given the high level of integration the U.K. grain and oilseed markets have with the E.U., it is currently more straightforward to identify the threats,” the AHDB said. “Reduced access to the single market is one of the biggest risks facing the U.K. arable farming industry, especially if tariffs apply to U.K. exports to the E.U. This would expose the U.K. industry more directly to raw global market forces.”

The AHDB said imposition of tariffs could have a particular impact on businesses processing cereals and oilseeds for export to the E.U.

“For example, there are risks around exports of flour to Ireland, given tariffs are higher on flour than on wheat,” the AHDB said. “The same is true if tariffs on imports into the U.K. are removed. The proximity of the U.K. to increasingly dominant producers and the low cost of moving grain around the world could quickly expose the U.K. to global production gluts, undermining domestic production and in turn exposing supply chains to periods of global shortage.”

As for opportunities that Brexit may present to U.K. agriculture, the AHDB said it’s difficult to assess now because there is little detail of the relationship the U.K. will have with the E.U. in the marketplace.

“Compared to other agricultural goods, grains and oilseeds are relatively free-trading commodities globally,” it said. “Accessing a market is more about price competitiveness, being able to supply the required specification and the ability to meet technical requirements, such as phytosanitary measures. The scenario where the U.K. maintains its own import tariffs would, in theory, allow it to flex them in response to the specific needs of the U.K. market and to protect the standards and traceability that domestic production represents. Whether this is indeed practical or politically acceptable is currently unclear.”

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U.K.’s export, import situation

U.K. exports fluctuate from season to season, due mainly to availability, price competitiveness and quality. Full-season U.K. wheat exports for 2015-16 reached 2.8 million tonnes, the highest since 2008-09. Total U.K. barley exports came to 1.99 million tonnes, the highest since 1996-97. AHDB said the strong export campaign was helped by the weakening of the sterling, which made U.K. grains more competitive internationally.

The AHDB noted that around 80% of wheat exported from the U.K. in 2015-16 went to the E.U., mainly to the Netherlands, Portugal and Spain.

“The latter has long been a key destination for U.K. wheat as Spain imports around 5 million tonnes per year of various grades,” the AHDB said.

With a rise in animal production in Asia, there has been an increase in demand for feed grain, including wheat, the AHDB said.

“Global freight rates are currently low, which has helped the U.K. to compete for demand against countries closer to Asia,” the AHDB said. “Exporting grain to Asia requires huge vessels and the U.K. has port capability, particularly in the south, to load such ships.”

Two-thirds of barley exports in 2015-16 went to the E.U., with the main destinations the same as for wheat. The U.K. exports both feed and malting barley, with a greater share of barley exports heading to non-E.U. destinations than wheat, the AHDB said.

“Algeria, in particular, has been a growing market, driven by increased feed demand and drought impacts on the local crop,” it said. “Saudi Arabia has also remained a key destination for U.K. barley exports.”

For oilseeds, the U.K. is part of the wider European rapeseed market, with the country’s two oilseed crushers also operating plants across mainland Europe, the AHDB said. In 2015-16, exports of rapeseed were almost entirely to E.U. countries, accounting for 94% of the 443,000 tonnes exported. Germany was the main destination within the E.U., mainly for use in biofuels.

AHDB said grain imports into the U.K. are dominated by wheat and maize.

“On average over the past 10 seasons, imports accounted for 11% of domestic wheat demand, though this varied between 7% and 20%, influenced by U.K. crop size and quality,” the AHDB noted. “The main origins for wheat imports are Germany, Canada and France, typically supplying around two-thirds of U.K. imports, primarily of milling grades. In particular, high protein wheat is often sourced from Germany and Canada.”

Of U.K. maize imports, around two-thirds were imported from the E.U. in 2015-16. Ten years ago, maize imports came almost exclusively from France, the AHDB said, but increasing volumes are being imported from Ukraine and Eastern E.U. countries, such as Romania.

“Depreciating local currencies as well as increased production of maize in the Black Sea region are factors behind the switch,” the AHDB said. “As well as competing with feed wheat in the export market, it is evident that imported maize is also competing for demand in the U.K. marketplace.”

In terms of oilseeds and their products, the U.K. mainly imports soy meal, with 2015-16 levels at 2.26 million tonnes, the highest volume ever. The AHDB said the majority was from non-E.U. countries, in particular Argentina, as a critical raw material in the production of animal feed.

Possible trade scenarios

The AHDB said new Free Trade Agreements (FTAs) with non-E.U. countries can only be put in place once the U.K. has left the E.U. If the U.K. were to negotiate a relationship with the E.U. that involves staying within the Single Market or the E.U. Customs Union, it would have to adopt current E.U. tariffs on imports from outside the E.U. It would have less flexibility to negotiate its own trade deals with partners outside the E.U., although some simpler, less comprehensive deals would still be possible. In this situation, little would change in terms of the U.K.’s trade in agricultural products.

However, other possible scenarios may have a significant impact on trade flows for agricultural products, the AHDB said.

One option is that the U.K. may negotiate a trade agreement with the E.U. that falls short of providing full access to the single market, it said.

“This might look like FTAs that the E.U. has negotiated with a range of other countries,” the AHDB said. “Such an FTA might allow free access to the single market for most products but there still may be tariffs for some ‘sensitive products,’ which would be likely to include some agricultural outputs.”

AHDB noted that given the complex negotiations involved in agreeing to a trade deal, it is possible, and perhaps likely, that the U.K. may not have reached agreement with the E.U. by the time it leaves.

“In this circumstance, there may be an interim deal agreed, allowing free trade between the E.U. and the U.K. to continue while a permanent agreement is reached,” it said. “However, if this is not possible, the U.K. would revert to trading with the E.U. on the same basis as other WTO members without a trade deal. This would mean that U.K. exports would be subject to import tariffs when entering the E.U.”

Depending on the nature of any trade agreement with the E.U., the U.K. may need to decide whether to impose import tariffs on its own, AHDB said.

“One option would be for it to continue to apply the same tariffs as the E.U. on all imports, which would include those from the E.U.,” it said. “However, this would be likely to lead to higher consumer prices, including for food, which may be politically unacceptable.”

Because of this, the U.K. government may prefer to open up wider access to the U.K. market, at least for some products, the AHDB said.

“It could do this by just lowering or removing tariffs, but this would automatically apply to imports from outside the E.U. as well as inside it,” the AHDB said. “Alternatively, it could be done using import quotas, which would allow a defined volume of product to enter the U.K. market at reduced or zero tariffs. Either approach would open many U.K. industries, including agriculture, up to increased competition, and some would be at a competitive disadvantage, at least in the short term.”

The AHDB said any deal with the E.U. short of membership of the single market or E.U. Customs Union would leave the E.U. free to set aspects of its own trade relationship with non-E.U. countries. This would include the ability to negotiate trade deals, including FTAs, with trading partners based on their significance to the U.K.

Those campaigning for Britain to leave the E.U. argued that securing autonomy in this area and increasing the U.K.’s trade with the rest of the world would be a benefit of leaving the E.U., the AHDB noted.

“However, the position of agricultural goods within these negotiations is likely to be extremely complex,” it said. “In many trade agreements, tariffs remain in place on sensitive products, and these products are very often agricultural goods. In addition, non-tariff barriers are often used to limit trade in agricultural goods.”

Current FTA's and negotiations 

The E.U. currently has FTAs with 58 countries, including Mexico, South Africa, Chile and South Korea. Trade talks also are ongoing with countries in other parts of the world.

In its report, the AHDB said although the status of existing FTAs post-Brexit is not certain, it appears likely they would not apply to the U.K. after exit from the E.U. Therefore, to retain free access to the countries involved, the U.K. will need to negotiate with them, as well as any other countries it wishes to trade freely with. “Past experience suggests that this is likely to be a lengthy process,” the AHDB said. “The U.K. can only finalize and implement FTAs with non-E.U. countries once it has left the E.U., although talks could take place before that.”

Both the E.U. and the U.K. also have many bilateral agreements in place with a wide variety of countries, which govern aspects of trade.

“In many cases these will cover technical aspects such as sanitary and phytosanitary measures, export certification or inspection processes,” the AHDB said. “Other examples involve providing access to tariff rate quotas for specific products.

“The vast majority of such bilateral agreements made by the U.K. rely on the fact that the U.K. is subject to E.U. rules and regulations.

“Many of these bilateral agreements will require renegotiation to reflect the new situation. This may apply to existing U.K. bilateral agreements as well as those previously handled at the E.U. level. Although agreements of this kind are likely to be simpler to implement than full FTAs, failure to do so could close off trade with the countries involved, at least temporarily.”

The AHDB said while many of these agreements can probably be updated quickly, some are likely to require significant time, in some cases because of the need for inspection or other assessment of any new regulations.