Horizon Blog: Is our focus on new trade deals misplaced?

Tuesday, 31 May 2022

As we approach year two of reductions in Basic Payments in England, and as those reductions increase in size for most farmers, I have been reflecting on my team’s work since the EU referendum.

Back in 2016, before any details of domestic policy changes, Free Trade Agreements (FTAs) with new trading partners and the trading relationship the UK would have with the EU post departure were available, we constructed several possible scenarios that we felt sketched out the possible landing zone.  Our analysis showed that for each scenario, changes in domestic policy had potentially more impact on Farm Business Incomes (FBI) than changes in trade, the only exception being if we hadn’t reached agreement with the EU on tariff free trade.

There is always a great deal of speculation as to what the potential impact of any new trade deal may be. Media headlines tend to focus on the extremes with threats of foreign imports flooding the UK markets with cheaper products produced to lower standards with a disregard for animal welfare or environmental concerns. The truth is rarely so extreme. Trade takes place based on supply and demand factors and exporting nations are well practised at supplying and marketing the various products to markets of greatest value. The view that lower costs of production in one nation will automatically result in a flood of exportable surplus arriving on UK soil is vastly oversimplified.  Whilst FTAs facilitate trade by generally lowering barriers to trade, they don’t suddenly create new demand or supply.

In our more recent analysis, we have examined the potential impact of the Australian FTA and are currently working on the potential impact of the New Zealand FTA. What we have found is that, certainly in the short to medium term, both New Zealand and Australia have more lucrative markets on their doorsteps. Furthermore, demand in these markets is expanding rapidly, with the growth of the middle class in East Asia, and production is not forecast to keep pace with this expanding demand. This means that it is unlikely that either country would divert product away from current customers to a market like the UK where prices are lower. It is more likely that they may send a small volume of high value cuts, especially in beef, to the UK foodservice market rather than the often-feared flood of cheap imports. Of course, even small volumes of high value product have some potential to disrupt domestic markets, but our analysis shows this is likely to be marginal in the short to medium term.

In contrast, we know from information published by Defra, that Direct Payments will halve for most farmers by 2024 and disappear completely by 2028. Given that Direct Payments make up a significant proportion of FBI in many sectors, in particular grazing livestock and cereals, shouldn’t this be of greater concern than the transition to a less protected trading environment?

Both these issues are incredibly important to farming. The FTAs create options for the major exporters should trade relations with existing customers be disrupted. We live in a world where geopolitical relations can shift and having the UK as a potential customer gives the major producers flexibility if things change suddenly. But this is a ‘what if’ scenario and we have explored this in our analysis. The policy changes are happening now. What’s more, policy changes in England are developing as a collaborative process with farmers having the opportunity to participate in pilots and feedback what is working and what isn’t. Defra are well aware they have a job to do building trust within the farming community, but if we don’t take this opportunity to shape our future, we may lose it.