Brexit – an opportunity to end subsidies?

SINCE THE Brexit decision was made sterling has been volatile. This is no surprise, since the value of a currency reflects the confidence traders and investors have in it and the economy behind it.
The fall has been a plunge against the US dollar, but against the euro it has been less dramatic because Brexit has undermined already slim confidence in the euro. However with uncertainty about the UK economy set to continue, sterling will remain volatile around a lower value against the euro than before the referendum vote.
That is bad news for anyone going on holidays – but it is good news for farming and indeed for those with a diversification venture trying to attract tourists from outside the UK.
Currency values and the prosperity of farming have always been linked. This was the case long before the CAP was invented and will remain the case when the UK is outside the EU. In general, weak currencies make exports easier and protect the home market from imports. Evidence that this is the case is the economic pressure Ireland, as a eurozone member and major food supplier to the UK, is feeling now and why it is so concerned about Brexit.
The same is true for French dairy products, Dutch and Danish bacon and all the others that take advantage of the UK’s reliance on imports. These countries have two choices – accept a lower return in euros, or secure a price rise from supermarkets, which is an unlikely prospect. This is the basis for suggestions before the referendum that Brexit would drive up food prices, but those claims ignored the commercial realities of the UK market and the price pressure supermarkets exert on suppliers.
Whatever the currency arguments, agriculture is better off financially now than when sterling soared before the referendum. Its weakening should have a direct impact on milk prices, and that is certainly needed. The more export dependent a sector is the bigger the impact of the currency change over the past month.
The market becoming less attractive for those exporting to the UK is a less direct relationship, and so will take more time to be felt. The other impact will be when we get into September and the rate is set for converting euro single farm payments to sterling. This fell dramatically over the past two years, but that should be recouped this year, which will be a welcome cash flow boost at the end of another difficult year.
This could all change, depending on a range of factors, particularly the actions of the Bank of England to shore up the economy. This is just further proof that uncertainty and volatility are the new norms, and they will be around for years rather than months. In theory sterling should remain weaker than in recent years, to the benefit of agriculture, but that could change if one of the spin-offs of Brexit is to further undermine confidence in the euro. If others look as though they might follow the UK lead, currency relationships could swing dramatically, although hopefully not before the end of September and the setting of the single payment conversion rate.
With the benefit of hindsight, we know now that it was the collapse of the New Zealand dollar in the 1980s, as a result of wider economic problems, that made the enforced removal of farm subsidies a successful gamble. This is not however a situation the UK government can use to justify a tough line on replacing the CAP with Treasury support.
The New Zealand situation was unique, in that there are few if any countries in the world as export dependent. That is not the situation in the UK and failure to match CAP support would be disastrous. That is why in the run up to the referendum the farm commissioner, Phil Hogan, sought unsuccessfully to convince farmers CAP payments were guaranteed through the Treaty of Rome that set up the original EEC while the alternative was a gamble of the generosity of the UK Treasury.
Already newspapers are carrying articles suggesting Brexit is an opportunity to end subsidies for farmers. If that thinking becomes mainstream it will be a huge threat to agriculture, since unlike New Zealand in the 1980s, no matter how great the fall in the value of sterling becomes, it could never be enough to make subsidy free agriculture viable in the UK.