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Brexit Update:Considering the Impacton Irish Farm Incomes
Trevor Donnellan, Kevin Hanrahan, Fiona Thorne29th November 2016
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Brexit – the Story So Far• June 2016:
– Political upheaval due to outcome of referendum
• July 2016:
– Theresa May appointed as British PM – says “Brexit means Brexit”
• Oct 2016: May asserts that article 50 will be triggered
– by end March 2017
• Nov 2016:
– High Court holds that UK Parliament must vote on Article 50
– British government says it will appeal judgement
• Today
– General uncertainty about when the Brexit negotiations can begin
– Not to mention when they might conclude !
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UK Agri-Food Trade
• Second largest economy in EU28
• UK is a major net importer of food
– Unlike most other large EU member states
• UK has an agri-food trade deficit of €31.7 billion (2015)
– This trade deficit is mainly with the EU
• UK self-sufficiency higher in some agri-food sectors
– Net imports of dairy, beef, pig meat, fruit are significant
– Relatively balanced trade position for cereals & sheep meat
– Large positive net exporter in beverages
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Importance of UK toIrish agri-food exporters
• UK is important market for agri-food exports
– 43% of IRL agri-food exports in 2015
– >52% of IRL beef exports
– >43% of IRL dairy exports
• UK is also important export market for
– Mushrooms
– Timber
– Prepared Consumer Foods
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Brexit: Long Term and Short Term
• Brexit will affect IE-UK agri-food trade
– in the form of tariffs and red tape
– slower growth in Irish agri-food exports
– weaker farm gate prices for Irish farmers
• Precise Brexit terms unknown
– creates uncertainty which hinders business planning
• But … immediate impact on competitiveness ofIrish exports
– via sterling v euro exchange rate
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Sterling Rate v Euro
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Ster
ling
per
Euro
7
A temporary or structural exchange rate adjustment ?
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Value of Irish Exports to UK2015 and 2016 (to Sept)
8
0
200
400
600
800
1000
1200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
eu
rom
.
2015
2016
€386 m (-5.5%) lower Jan – Sept 2016
Source: COMEXT Eurostat
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Can we develop new markets?
• If Irish exports to UK contract, can we develop newmarkets for products?
• Depends on a range of factors
• Demand Preferences
– product characteristics (is there a “taste” for it)
• Supply Logistics
– product perishability (is shelf life limited?)
– distance to market (in terms of time)
– shipping cost (cost/product value ratio)
– will product need to be shipped via UK? (red tape?)
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Future funding of the MFF/CAP
• Implications of UK leaving EU
• UK contribution to EU budget
– Circa €10 billion annually (~ 10% of total)
• Options for EU budget post-Brexit
– a. UK continues to contribute?
– b. Reduced EU budget
– c. Increased MS contributions
– or … some combination of a, b and c
• What future % of EU budget will CAP represent?
– Strong possibility that CAP budget may decrease
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Future funding of the MFF/CAP
• Potential dilemma for Ireland
– Already net contributor to EU
– Maintaining EU budget to maintain size of CAP?
– Increase in Ireland’s net EU budget contribution?
• Cost to Ireland to preserve EU CAP budget
– No guarantee that Irish CAP % share is preserved
• Increased contribution vs. CAP reduction?
– Net outcome for Ireland increasingly unclear?
– Would interests of farm lobby and State coincide?11
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Irish Agriculture and Brexit
• Brexit would have 4 transmission channels via
– Exchange rate (weak sterling)
– Tariff and non tariff barriers (if no FTA)
– Changes in new UK ag policy
– Change in level of CAP payments to Ireland
• Market (price) and policy (support payments) impacts
– Different Ag. sectors vary in their UK exposure
– Sectors vary in their dependence on market/policy support
– Sectors vary in the extent of their current tariff protection
• Price and policy impacts of Brexit will differ by sector
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Irish Agriculture and Brexit
• A priori what determines size of negative impact?
– Markets with high levels of current tariff protection
– Sectors with heaviest reliance on exports to UK
– Sectors where farm incomes are most dependent onCAP direct payments
• What sectors will be most resilient ?
– Sectors with most profitable (farm & agri-food)supply chains
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A simple static example
• Looking at our four principal sectors
– Beef, dairy, sheep and tillage
• What are the possible implications for farm incomes
– Based on market (price reduction) and policy (support reduction)
• Static analysis – short term impact – worst case outcome
– Caveat - adjustment would take place in medium term
• Look at the implications of
– Sector specific % output price reduction and
– 10% reduction in CAP support in all sectors
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Something about theassumptions we have to make
• Assumed market price shocks
• Based on LEI report for NFU
– “Brexit -Trade liberalisation scenario”
– Price impacts reflect Irish level of dependence on UK market
• Assume EU budget hole not filled by remaining EU27
– 10% cut in EU CAP budget & Irish direct payment receipts
• Static analysis based on average Teagasc NFS Output,Income and Direct Payment data in 2013-2015
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Brexit: Average Irish Beef Farm
• Biggest % impact of Brexit shock in Irish Ag.
– High levels of current tariff protection
– High dependence on UK market
• Together imply largest price shock of -10%
– High dependence on Beef FFI on CAP subsidies
• Implies large shock to direct payments income
• Cattle Rearing and Cattle Other FFI down 37%
– Importance of price and policy shocks differ slightly
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Brexit: Average Irish Dairy Farm
• Dairy has lower exposure to UK market than beef
• EU dairy market has relatively low level of tariffprotection compared with beef
– Irish milk prices assumed to fall 5%
• Dependence of dairy FFI on subsidies is lower than inthe case of beef
• Dairy FFI falls by 20%
– Reflects importance of non-dairy enterprises in output andimportance of direct payments to FFI
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• Irish sheep markets potential for positive impact
– UK largest exporter in EU and current competitoron continental EU lamb market
– How TRQ are allocated post-Brexit will beimportant
– Assumed small negative price impact -5%
• “Mainly Sheep” FFI down 21%
– Driven by high dependence on subsidies and veryhigh output share of beef on “mainly sheep” farm
Brexit: Average Irish Sheep Farm
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Brexit: Average Irish Tillage Farm
• Cereals markets likely to be least affected byBrexit (of the 4 farm systems examined)
– Current low levels of tariff protection
– UK not a major net importer or net exporter
– Means cereals price shock likely very small (-1%)
• Tillage FFI down 22%
– Tillage farm FFI highly dependent on subsidies andsignificant beef component of Tillage farm output
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Brexit Shock:Static Impact on System FFI
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Dairy CattleRearing
Cattle Other Sheep Tillage
eu
ro
Average 2013-2015 Policy Shock Price Shock Price & Policy Shock20
-€13k
-€4k -€5k -€3k
-€7k
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Brexit Shock:Static Impact on System FFI
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
Dairy Cattle Rearing Cattle Other Sheep Tillage
Policy Shock Price Shock Price & Policy Shock
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Conclusions
• The UK’s departure from EU may reduce
– Ireland’s access to the UK market
– The size of the EU budget (and the CAP budget)
• Brexit will have negative implications for output prices,output value and income at farm level in Ireland
• Lower levels of CAP support are possible
– Static impact on average FFI of -26%
• Brexit impact unlikely to be uniform across farm types
• Drystock farm incomes most vulnerable to Brexit
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Conclusions
• NB: Static nature of analysis
– No account taken of possible supply response
• NB: Still no clarity on what Brexit will mean
– Magnitude of price impacts highly uncertain
– Implications for EU & CAP budget also uncertain
• Key Conclusions for Family Farm Income
– Brexit a negative for Irish farm incomes
– Brexit impact magnitude likely to vary by system
– Likely largest on least resilient farm types
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