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Farms Brexit - Trump commentary

December 2016

Trump commentary

Just as we started to think we understood what Brexit might mean for UK Farming, the result of the elections in America puts us back into a world of disbelief and huge uncertainty.  This uncertainty will be treated with concern by some but others may see the inevitable changes as an opportunity.

Many farm businesses are enjoying a brief period of improved margins, but the influence of a weak sterling after Brexit has had an immediate positive influence on output prices whereas the equivalent effect of increased input prices had not yet impacted.

Our views on the likely effect of the UK exiting Europe were broadly as follows:

  • Subsidies will be reduced and refocused to target the wider environment (not just conservation) and areas of the UK which require subsidy to be sustainable e.g. hill farming.
  • The availability of willing and low-cost labour will be dramatically reduced.
  • We will have a more direct exposure to world markets.
  • It is highly likely that UK agriculture will be used as a bargaining chip to secure trade deals for areas of the UK economy seen as more important by Government.
  • The positive effect on farm prices of a weaker sterling will continue but this may be diluted by an even weaker Euro.

Now, with Donald Trump as US President in 2017:

  • Europe is very vulnerable and may not exist as an organisation for the UK to exit from.
  • The trade treaties that are currently in place are now in play and the US’s attitude to future deals will be far more protectionist.
  • This will make world trade more complex, more expensive and less reliable.
  • This may actually help UK Agriculture in that food security and reliability of supply will start to become a far more important issue for our Government and for domestic consumers.
  • Added to this, the growing consumer interest in food quality and provenance should lead to a far greater reliance on UK produce, especially in fresh food and quallity products.

So how should UK farmers react to this outlook:

The current ‘typical’ farm business where the farming activities roughly break even and the business owners effectively live off subsidies will have to end.

Businesses will either produce world traded products at the lowest possible cost of production by achieving sufficient scale or specialise in identifiable quality, retaining more of the available margin in the food chain.

Those businesses that choose to achieve cost savings through scale must invest in the correct technology to reduce input usage – much of the current increase in fixed costs for farmers is caused by investing in expensive technological improvements that we don’t need.  Future investment must lead to reduced variable inputs use.

Benefits of scale can be achieved through contracting out to larger operators but these operators must themselves be large enough and technically proficient; using technological advances to reduce costs for all parties.  Those businesses that choose to build profitability by specialising and retaining more of the margin available in the whole food chain will, we think, benefit from a greater demand for home produced food and a willingness from consumers to pay for it.

Whilst subsidy receipts for many will reduce, for others they may increase.  Out of Europe, the UK Government will be looking to target subsidies to deliver measurable benefit such as flood mitigation, water quality and sustaining rural communities.  They will also be looking to reduce the cost of administering the subsidy system and have already suggested that farm businesses will be able to benefit from a Gold Standard which will result in fewer inspections.  The Gold Standard will be achieved by audited membership of existing assurance schemes.

Our advice to farming clients to prepare for Brexit and the changes in America includes:

  • Decide whether the business should focus on production of basic commodities at world prices or specialise in high value specialist products sold direct to end user.
  • Plan for a substantial reduction in subsidies.
  • Aim to reduce costs wherever possible.
  • Use technology and efficiency to reduce input costs and labour.
  • Benchmark to assess where improvements can be made.
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