Publication - Research and analysis

Brexit - agricultural sectors: analysis of impacts

This research assesses the impacts of different potential outcomes beyond the end of the EU transition period on key Scottish agricultural sectors. The work combines trade-model and farm-level analysis supplemented by industry interviews and desk-based research.

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Contents
Brexit - agricultural sectors: analysis of impacts
5. Brexit Impact – Cereals

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5. Brexit Impact – Cereals

5.1 Tariff Impacts

5.1.1 UK Imports

The import tariffs that would apply on imports from the EU and non-EU countries under a No Deal scenario for cereals and cereal products are set-out in ad-valorem equivalent (AVE) terms in Table 5‑1. On the face of it, it would appear that the tariffs for wheat and barley are very high, estimated at almost 50% on EU imports under a No Deal Brexit. However, it is important to note, that if wheat and barley is imported via a tariff rate quota (TRQ), the resultant tariffs (depicted as the in-quota rate) are substantially lower, at €12/t for feed wheat and barley and €8/t for malting barley. Therefore, in AVE terms the estimated tariffs are just over 6% for imports from the EU with respect to feed wheat and barley and 4.1% for malting barley. Due to the higher price of non-EU imports of wheat and barley obtained from HMRC trade data, the corresponding AVE rates presented in Table 5‑1 are lower versus the EU.

Table 5‑1 – Price per tonne and estimated Tariffs for UK Cereals Imports – 2017-19 (AVE%)
HS Code Description EU Non-EU
Price £/t AVE % In-quota AVE % Price £/t AVE % In-quota AVE %
10019900 High quality wheat (excl. seed, durum wheat) 163 0% n/a 228 0% n/a
10039000 Feed Barley (excl. seed) 162 48% 6.2% 303 25% 3.3%
10039000 Malting Barley (excl. seed) 162 48% 4.1% 303 25% 2.2%
10059000 Maize (excl. seed for sowing) 161 0% n/a 158 0% 0.0%
11010015 Flour of common wheat and spelt 362 39% n/a 652 22% n/a
11071099 Malt (excl. roasted, wheat and flour) 357 30% n/a 1,225 9% n/a
11072000 Roasted malt 498 25% n/a 1,587 8% n/a

Sources: HMRC and Andersons

Complicated formula based on a US reference price. No tariffs have been paid in recent years.

Subject to TRQ limits as set-out in Section 5.2. Assumes exchange rates applied when converting EU CET to UKGT for wheat (€1=0.832) and barley (€1=£0.828) as set-out by the UK Government when publishing the UKGT.

Table 5‑1 also shows estimated tariffs for other cereal products, derived from wheat and barley, which would also influence the UK's post-Brexit competitiveness in a No Deal situation. For wheat flour, these are prohibitive (39%) and would act as a significant impediment to imports from the EU. Given that the import tariffs for milling wheat are currently set at zero, it is likely that imports of flour would be replaced by milling wheat, meaning greater volumes of processing within GB. Malt tariffs would also be significant, ranging from 25-30% on imports from the EU. As Scotland imports relatively small volumes of malt, aside from some Scandinavian material, tariffs are not anticipated to have a significant impact.

5.1.2 UK Exports

The No Deal Brexit tariffs which would apply to UK cereals exports to the EU are shown in Table 5‑2. Whilst UK exports to non-EU countries are also subject to tariffs, where no free-trade (or rollover) agreement is in place, as these tariffs currently apply and vary greatly from country to country, these are not anticipated to change once the Transition Period ends in January. Therefore, they are not shown.

The estimates show that the tariffs on out-of-quota feed wheat exports would be substantial, estimated at 52% for both wheat and barley. The slight differences between the tariffs on UK exports versus those on imports, shown in the previous section, are to do with the exchange rates and prices used. The price per tonne estimates are converted from Sterling into Euro using an exchange rate of £1=€1.12. Any exports that take place within via a TRQ (in-quota rate) are substantially lower, estimated at 6.6% for feed wheat, 6.7% for feed barley and 4.5% for malting barley. However, this should also be considered within the wider trade context and the UK's subsequent place in the global market. Primary research participants pointed out that prices for Russian feed wheat are approximately £17-20/tonne lower than the UK and EU. They would still be more competitive than UK feed wheat exports to the EU (via TRQ) under a No Deal Brexit scenario. Therefore, if tariffs apply, then in years when the UK has an exportable surplus, industry participants suggest that it will be more difficult to export to the EU and prices would come under pressure until they become competitive against the likes of Russia which exerts an influence on world market prices used in Agmemod.

Table 5‑2: Estimated Tariffs on UK Cereals and Cereal Exports to the EU27 – 2017-19 (AVE %)
HS Code Description Price £/t AVE % In-quota AVE %
10019900 High quality wheat (excl. seed, and durum wheat) 162 0% n/a
10019900 Wheat (excl. seed, durum wheat 162 52% 6.6%
10039000 Feed Barley (excl. seed) 159 52% 6.7%
10039000 Malting Barley (excl. seed) 159 52% 4.5%
10059000 Maize (excl. seed for sowing) 165 5.6% 0.0%
11010015 Flour of common wheat and spelt 404 38% n/a
11071099 Malt (excl. roasted, wheat and flour) 427 27% n/a
11072000 Roasted malt 690 20% n/a

Sources: HMRC and Andersons

Complicated formula based on a US reference price. No tariffs have been paid in recent years.

Subject to TRQ limits as set-out in below.

5.2 TRQ Impacts

Table 5‑3 details the proposed division of existing EU28 TRQs for wheat and barley between the UK and the EU27 based on a December 2018 agreement[23], which despite objections from other WTO members, have been assumed. The allocations for other cereals (e.g. maize) are provided in Annex III.

Overall, the vast majority (97%) of cereals TRQs have been allocated to the EU27 and for selected cereals a limit of just over 172,300 tonnes could be imported into the UK. Over 70% of this relates to feed wheat and the majority of the remainder relates to malting barley (30,101 tonnes).

With regards to the EU27's allocation, of most interest to the UK will be the 2.29Mt which can be imported from a variety of other countries (excluding the US and Canada). This allocation surpasses the 2Mt of feed wheat which has been exported from the UK to the EU in the past and would come with a relatively low tariff (€12/t). On the face of it, this should mean that UK exports of feed wheat to the EU27 would still be possible, albeit more costly, from January 2021. As mentioned above, with Russia and Ukraine much more competitive than the UK, any TRQ-related price rises would have a significant negative impact on the competitiveness of UK exporters in a No Deal scenario.

For malting barley, it is also worth noting that the 20,789 tonne TRQ limit on future exports to the EU27 could potentially restrict the UK, particularly in East Anglia where significant volumes of malting barley exports to the EU Continent have taken place in the past. These allocations between the UK and the EU27 have been incorporated into the Agmemod modelling analysis below.

Table 5‑3 – Proposed Division of Selected EU28 Cereals Import TRQs between EU27 and UK
Description Country Order No. EU28 (t) EU27 (t) EU27 Share (%) UK (t) UK Share (%)
Quality wheat Erga Omnes 90075 300,000 300,000 100% 0 0%
Common (feed) wheat (medium and low quality) USA 94123 572,000 571,943 99.99% 57 0.01%
Feed wheat Canada 94124 38,853 1,463 3.80% 37,390 96.2%
Feed wheat Other 94125 2,371,600 2,285,665 96.40% 85,935 3.6%
Feed wheat Erga Omnes 94133 129,577 129,577 100% 0 0%
Barley Erga Omnes 94126 307,105 306,812 99.90% 293 0.10%
Malting barley Erga Omnes 90076 50,890 20,789 40.90% 30,101 59.10%
Preparations derived from malting barley Other 92905 20,000 20,000 100% 0 0%
Preparations derived from malting barley Other 92903 100,000 100,000 100% 0 0%
Selected Cereals Sub-total 3,890,025 3,736,249 96.0% 153,776 4.0%
Other Cereals Materials 3,871,943 3,790,116 97.9% 81,827 2.1%
Cereals Total 7,761,967 7,526,365 97.0% 235,603 3.0%

Source: Council of the European Union (2018)

5.3 NTM Impacts

Although the HS codes for wheat do not distinguish between milled wheat and feed wheat, depending on the size of the UK harvest each year, the UK often trades significant volumes of these commodities. In recent years, when the UK has had a strong wheat harvest, up to 2 million tonnes of feed wheat have been exported to the EU, particularly countries such as Spain. As Table 4‑2 above illustrates, significant tonnages of barley are also exported to the EU (more significant than wheat during 2017-19). Although any exports of malting barley that do take place are primarily exported from East Anglia to the Continent, the imposition of regulatory barriers on UK-EU trade will have some effects on the UK market generally, including Scotland.

Table 5‑4 sets-out the estimated NTM costs on average to the sector (i.e. on a probability basis), for selected cereals commodities and associated products. Further information, including NTM estimates on a checked load basis, is provided in Annex III. As shipping wheat and barley via RoRo transport is costly, the focus here is on bulk-shipments only, as this reflects reality in most cross-border grain trade. Whilst the size of shipments can vary from 3,000 tonnes to 60,000 tonnes or more, a 'typical' shipment size of 30,000 tonnes was assumed. The associated NTM costs are miniscule, coming in at about 0.1% AVE under both scenarios.

NTMs are, therefore, of a low concern for grains provided they have the initial approval to enter the EU. Of course, the NTM estimates compiled during this study are based on UK and EU standards being harmonised. If these diverge in future, then NTM costs would increase, perhaps significantly.

Table 5‑4: Estimated NTM Costs to the Sector- Selected Cereals & Cereal Products (AVE %)
HS Code Description UK Imports from EU27 UK Exports to EU27
FTA No Deal FTA No Deal
10019900 Wheat (ex. seed) (Bulk-shipped (30Kt)) 0.1% 0.1% 0.1% 0.1%
10039000 Barley excl. seed (Bulk-shipped 0.1% 0.1% 0.1% 0.1%
11010015 Wheat flour (RoRo (28t)) 2.7% 4.2% 2.4% 3.9%
11010015 Wheat flour (LoLo (28t)) 2.5% 3.9% 2.3% 3.5%
11071099 Malt (RoRo) 3.2% 5.1% 3.2% 5.1%
11071099 Malt (LoLo) 3.3% 5.0% 3.3% 5.0%

Source: The Andersons Centre (2020)

Table 5‑4 also outlines NTM AVEs for wheat flour and malt as both these products are closely linked with wheat and barley. According to the primary research, significant volumes of milled wheat flour (circa 500Kt) are imported into the UK annually from non-EU countries (e.g. US, Canada and the Ukraine) principally via ports such as Southampton and Tilbury. There are also significant amounts of milling flour products (circa 230Kt) exported into the EU27, particularly Ireland.

NTM AVEs for milled wheat flour are projected to range from 2.3% to 4.2% under both scenarios. As elsewhere, such costs will have an impact on trading margins and will need to be priced into the system, most likely in the form of lower farmgate prices or higher costs to end-users. In the flour sector, as a greater number of stakeholders use RoRo transport and given that the importance of the susceptible Calais-Dover route, any exceptional delays could have big repercussions, particularly if key delivery windows are missed and penalties ensue.

According to industry experts, malt exports represent nearly 15% of UK production, mostly to non-EU markets, principally Japan, the US and Vietnam. That said, the domestic market remains the primary driver for UK production. This is particularly the case in Scotland where the vast majority (90%+) of the malt produced from Scottish barley is used in whisky production. Relatively few imports take place.

Estimated NTM AVEs range from 3.2% to just over 5% under a No Deal. Costs are slightly higher with RoRo, due to the impact of time delays for loads which are subject to physical checks and sampling. One of the key concerns is the time required to get phytosanitary certificates for exports to third countries. Any additional delays arising from Brexit (e.g. more time needed to get lab results) could start to have a significant impact on securing export deals.

It is important to emphasise that the estimates presented here primarily relate to outputs. The impact of NTMs on key inputs also need consideration. This is not just in terms of primary raw materials but could potentially stretch back as far as farm-level inputs. At present, whilst the UK and the EU remain harmonised, the potential impact is not that noticeable. However, if/when the UK and the EU diverge this could cause issues for the malting industry (e.g. GM; banning of glyphosate). Despite the above concerns, the prospect of trade barriers on UK-EU trade is a relatively low concern for the malting sector. Of far greater concern is the impact of tariffs on exports of Scottish whisky to the US. If these were removed, it could result in a significant boost to Scottish exports which are estimated to be 20-25% lower this year due to a combination of the US tariffs and the Covid Crisis.

5.4 Labour

Whilst migrant workers are present at both farm and at processing levels, the ending of Free Movement was not cited as a major issue by cereals' sector primary research participants. Particularly as it is believed that most migrant workers would quite easily qualify for 'settled status'. Some acknowledged that obtaining new labour could pose challenges if competition for workers increases from elsewhere.

5.5 Effects on UK Output and Trade

Table 5‑5 outlines the projected short-run (2021) and longer-term (2025) Brexit impacts for wheat and barley by scenario vis-à-vis the Base in terms of production value and quantity, prices and trade. It must be highlighted that because Agmemod 'solves' its model equations based on net exportable surpluses for each country, these do not distinguish between the EU and non-EU. Therefore, it is not possible to present results on projected changes to trade with the EU directly. Instead, overall changes to exports and imports are provided. Furthermore, as the main focus of Agmemod is to provide market outlook and growth projections, the baseline also evolves over time. An explanation of the reasoning behind why Base changes between the short-run and long-term has not been provided in detail here. Accordingly, the main focus of the projections should be on the percentage change against the Baseline in each period. Immediately after Table 5‑5 further commentary is provided for wheat and barley.

Table 5‑5: Projected UK Wheat and Barley Brexit Impact by Scenario (% Change vs Baseline)

Commodity and Parameter 2017-2019 Baseline FTA 2021% Change FTA 2025 % Change No Deal 2021 % Change No Deal 2025 % Change
Wheat          
Output (£m) 2,207 0.0% 0.0% 2.0% 5.3%
Output (Kt) 14,872 0.0% 0.0% 0.0% 3.3%
Domestic use (Kt) 16,035 0.1% 0.1% 1.1% 1.2%
Price (£/t) 148 0.0% 0.0% 2.0% 2.0%
Exports (Kt) 705 -0.4% -0.3% -6.4% 9.4%
Imports (Kt) 1,868 0.2% 0.2% 3.0% -7.0%
 
Barley          
Output (£m) 999 0.0% 0.0% -10.3% -17.4%
Output (Kt) 7,242 0.0% 0.0% 0.0% -7.8%
Domestic use (Kt) 6,107 0.1% 0.1% 2.2% 0.5%
Price (£/t) 138 0.0% 0.0% -10.3% -10.5%
Exports (Kt) 1,230 -0.2% -0.3% -7.1% -32.7%
Imports (Kt) 94 0.0% 0.0% 7.7% 6.3%

Sources: Andersons, Defra and WUR

5.5.1 Wheat

FTA Scenario

Based on the Agmemod analysis, minimal changes are projected under the FTA scenario. This is because NTM costs are minimal for bulk shipments of grain and the industry is largely accustomed to trading across non-EU markets already. Whilst there may be some issues with specific customer specifications if, for instance, feed wheat is to be exported to the EU in the future, which could cause some time-delays, these are not anticipated to be significant. Furthermore, as the bulk-shipping of grain is quite independent of RoRo freight trade, the industry does not anticipate major issues occurring with any delays that might occur on the Dover-Calais route for example (although this could be an issue for flour products). Where problems could arise are on shipments of inputs and time delays when disease pressure is at its peak. This would be of particular concern in the first six months following the end of the Transition Period. However, with good supply-chain planning, these should be avoided.

Whilst 1 or 2 industry participants expressed some concern about the impact of NTM costs on livestock trade, the Agmemod analysis for grazing livestock (see Section 7.4) suggests that these will not be problematic under an FTA scenario.

No Deal

Under No Deal, more noticeable changes are projected. For wheat, production increases are forecast over the longer-term. This is partly due to increased demand for animal feed but as barley is forecast to experience price declines due to the imposition of trade barriers (including an in-quota tariff on any exports to the EU), its relative profitability versus wheat will decline. This, in turn, means that more farmers would switch towards growing wheat, driving up its crop area and production which Agmemod forecasts will rise by over 5% under No Deal in 2025. Given the relative importance of barley versus wheat in Scotland, this could have a more severe impact on Scottish output, where climatic conditions are deemed to be more conducive to growing barley than wheat.

Prices are forecast to increase by 2% driven by domestic demand, particularly in animal feed due to increased demand from the dairy and beef sectors. The imposition of tariffs on any imports from the EU27 would also support domestic wheat prices. Long-term imports are forecast to decline as the UK relies more on domestic production and given the significant increases in crop area and production, increased exportable surpluses are forecast.

With tariffs applying on trade with the EU, the UK will be more reliant on global markets. These are of course volatile and highly dependent on conditions in other regions (e.g. Black Sea). Although Agmemod does not model specific effects of bilateral trade between EU Member States and associated countries (e.g. Ukraine), it is anticipated that the UK would face further competition from the Black Sea region. Primary research input suggests that, although the in-quota tariff is much lower than the default (€95/tonne), the Black Sea region has been very competitive in recent years and has been encroaching on Mediterranean markets. Although the UK is currently competitive when exporting to Spain any further costs (e.g. tariffs) would erode its position.

5.5.2 Barley

FTA Scenario

Relatively minor changes are forecast as explained for wheat above. There is a slightly more pronounced decline in exports versus wheat because, as Chapter 4 illustrates, greater volumes of barley are exported to the EU, but these changes are still minor.

No Deal

Significant declines in the monetary value of output are projected by Agmemod. A 10% decline is forecast in the short-term due to the price decrease brought about by the imposition of in-quota tariffs on exports to the EU. Longer term, the value of output falls by over 17% as production (down by 7.8% versus Baseline) reacts to the lower prices and more farmers grow wheat which is considered to be relatively more profitable. Exports to the EU also fall significantly, in the short-term being affected by the in-quota tariff (€12/t) and longer-term, lower production coupled with some increased domestic use (particularly feed) leave a smaller exportable surplus, leaving projected exports some 33% lower.

Curiously, there is a rise in barley imports longer-term (up 6.3% against the Baseline). This is likely to relate to more UK farmers switching towards wheat due to the price impacts, meaning that some barley imports might need to take place. It is arguable that Agmemod is overplaying the extent to which imports rise for barley under No Deal.

5.5.3 Implications for Scottish Output

On, the face of it whilst a No Deal looks to be positive for wheat, the situation for barley is much more concerning, particularly given its importance in Scotland. Figure 5‑1 depicts the projected impacts of the percentage changes to output value and production tonnages derived from Agmemod and imposes these against the 2017-19 Base period to give an indication of their impact on Scottish cereals output.

In the Base period, combined wheat and barley output is estimated at £390 million. There are negligible changes under the FTA scenario but under a No Deal, short-term output declines by £25 million and longer term output is projected to be £40 million lower. As Figure 5‑1 clearly shows, this is driven by barley where declines of £47 million are projected over the longer term, which more than offsets that £7 million increase in wheat. As discussed above, the changes are principally due to price and its onward effects on growers switching towards wheat as it is more profitable than barley.

In tonnage terms, long-term barley production declines by 142Kt against the Base period, whilst wheat is 28Kt higher. Admittedly, the dynamics of the malting barley sector have not been considered in great detail within the analysis below. This may counteract somewhat the declines projected for barley below, particularly if whisky exports can resume their pre-Covid growth in other markets, buoyed by future UK trade deals and if the UK is successful in getting the whisky tariff on exports to the US removed, leading to a recovery in that market.

Figure 5‑1: Scottish Cereals Output & Production Effects by Scenario (2021-25)

Chart description below

Chart Description

Shows the impact of both Brexit scenarios on Scottish wheat and barley output in both monetary and tonnage terms for 2021 and 2025 against the 2017-19 Baseline.

Sources: The Andersons Centre and Wageningen University and Research (WUR)

5.6 Implications for Scottish Cereal Farming

Combining the Agmemod results above, primary research input and insights from previous studies, Table 5‑6 shows the projected impact of each Brexit scenario on Scottish cereals farms vis-à-vis the status quo (2018/19). These impacts were assessed at the farm-level using information obtained from the Scottish Farm Business Income (FBI) annual estimates[24]. This has been done via a static subtraction from the FBI results and further detail on the assumptions used is set-out in Annex IV where additional farm-level analysis using Andersons' Scottish Loam Farm Model is also provided.

Unsurprisingly, the FTA scenario impacts are limited and despite the imposition of some NTMs on cross-border trade. For instance, fertiliser costs are estimated to rise by 1%. Crop protection costs are up by 3%. Overall, crop-specific variable costs are 3% higher, which leads to a 1.5% decline in crop-specific gross margins.

As there are some livestock enterprises within the Scottish FBI cereals farm figures, changes to output and variable costs have also been considered (see Section 7.6 for more analysis). This results in a slight rise in total agricultural output and variable costs. Fixed costs are also slightly higher due to an increase in regular labour (assumed to rise by 2%, approximately half the increase in casual labour where there will be greater strain due to shortages in the horticultural sector).

The overall margin from agricultural production declines by 13.2% and when support (kept constant) is considered, the agricultural business surplus is 3.6% lower. This suggests that under an FTA cereals farming will continue to be profitable.

Under a No Deal, the 10.3% price decline for barley is the major factor behind the 3.7% fall in crops' output. The reason the overall crop output decline is not as pronounced is because a 2% price increase for wheat has been assumed and the prices of other crops (e.g. oats and OSR) have been kept constant.

Variable costs meanwhile are forecast to rise by 6.3% due to more pronounced increases in fertiliser (+3%) and crop protection (+9%) against the Base period. This culminates in a crop-specific gross margin decline of 8.4%.

Overall production margin is estimated to decline by 74%. Although it is still positive, it suggests that cereals farms will come under added pressure under a No Deal. In recent years, when the UK had an exportable surplus of feed wheat, markets were easily found on the continent. Whilst exports will still be possible post-Brexit (albeit with an in-quota tariff of €12/tonne), their competitiveness against Black Sea producers will be eroded significantly.

The overall agricultural business surplus is some 20% lower. This suggests that the profitability of Scottish cereals farming will decrease quite significantly under a No Deal.

Table 5‑6 – Projected Impact of Brexit on Scottish Cereals Farming (£/Farm)
Parameter 18/19 (Base) FTA % Ch. No Deal % Ch.
Crops Output (excluding support) 157,061 157,051 0.0% 151,245 -3.7%
Crops-Specific Variable Costs 49,979 51,556 3.2% 53,110 6.3%
Crops-Specific Gross Margin 107,081 105,495 -1.5% 98,135 -8.4%
Total Agricultural Output 182,578 182,680 0.1% 176,925 -3.1%
Total Agricultural Variable Costs 56,730 58,339 2.8% 59,780 5.4%
Total Agricultural Fixed Costs 113,430 113,559 0.1% 113,912 0.4%
Margin from Agricultural Production 12,418 10,782 -13.2% 3,233 -74.0%
Agricultural Support 33,184 33,184 0.0% 33,184 0.0%
Agricultural Business Surplus 45,602 43,966 -3.6% 36,417 -20.1%

Sources: Scottish Government (Scottish Farm Business Income (FBI) Publication) and Andersons

5.7 Concluding Remarks

Although profitability is down slightly under the FTA scenario, Scottish cereals farms would continue to be competitive. The situation is much more concerning under a No Deal, particularly if as a result of the trade deals that the UK strikes elsewhere, there is greater competition from imports in the livestock sector which, in turn, would erode domestic demand for feed wheat and barley.

Barley is of most concern under a No Deal. The ability of Scottish whisky distillers to continue to grow export markets will be crucial as Scotland is set to become more reliant on revenues from malting barley production to safeguard the profitability of its arable farming operations.


Contact

Email: richard.haw@gov.scot