The EU referendum is the issue of the year. But what are the facts? In the third of a series of briefings, Simon Wilson looks at the potential impact on Britain's farms.
What would happen?
If the UK government did nothing to make up for the loss of EU subsidies, then Brexit would be very damaging indeed, since most UK farmers operate on thin (or negative) margins and get an average 55% of their income from EU subsidies (on Defra figures). Direct payments to Britain under the Common Agricultural Policy (CAP) the EU fund that keeps farmers in business at a cost per citizen of just 23p a day, or keeps food prices artificially high, according to your viewpoint will average £2.88m a year from 2014-2020.
That's not a vast sum by the standards of multinational corporations, but it makes the difference between profit and loss for many small to medium-sized farms. For example, cereal farms earn an average of £100,000, and £55,000 of this comes from the EU single farm payment (a subsidy worth an average of €235 per hectare in England and €179 in Wales in 2015).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Farmers must be worried, then?
Brexit looks likely to bring more uncertainty to farmers than to others, especially since some analysts also predict that plunging profitability would also mean a fall in land values. "For farmers who have taken out debt against the value of their land, a loss of value could be fatal," according to consultancy Agra Europe: "18% of farms have current liabilities that exceed current assets." Moreover, 73% of all agri-food exports go to the EU (sheep and cereal are especially dependent on EU markets), according to a report by the National Farmers' Union (NFU).
So any disruption to access to the single market could be highly damaging, even if the fact that the EU exports twice as much to us as vice versa means they would have every incentive to agree a workable trade deal. "The absolute nightmare scenario", says the NFU's policy director Martin Haworth, "would be that we'd be outside the EU, we'd lose access to the single market, we'd have lower tariff barriers so food prices would drop and farmers' prices would come down, and our farmers wouldn't be subsidised, whereas our competitors would be, both in Europe and in large parts of the world."
But wouldn't the UK subsidise farmers instead?
Probably, at least to start with, but it's not clear by how much. The former secretary of state at the Department for Environment, Food and Rural Affairs (Defra), Owen Paterson a committed pro-Brexit campaigner argues that since the UK's net contribution to the EU (£9.8bn) is more than three times the current UK income from the CAP (about £2.9bn), a post-EU British government will easily afford to "pay as much, if not more than the CAP" to UK farmers.
Paterson reckons the government would be "idiotic" to take an axe to CAP funding, given its importance to farming, and instead would choose to maintain subsidies at current levels, at least to begin with.He points out that non-EU countries such as Switzerland, Norway and Iceland also choose to protect farmers with high levels of central government support, and there's every reason to think the UK would do the same.
Who agrees with him?
The current farming minister, George Eustice, does but not Eustice's boss, the Secretary of State, Elizabeth Truss. At the NFU's annual conference last week, the two ministers took opposing positions. Eustice urged farmers to back Brexit, saying there was not a "shadow of a doubt" that the UK, including its farmers, would be better off out, and would readily find £2bn a year from its Brexit "dividend" (which he put at £18bn) to spend on farming and the environment.
Truss, by contrast, argued forcefully against taking such a "leap in the dark" at a time of "severe price volatility and global market uncertainty". The facts, for now, are that while some sort of phased subsidy programme looks likely in the event of Brexit, there is absolutely no guarantee that it would be on a similar scale to the CAP, and neither David Cameron nor Truss have made any promises.
What do industry analysts say?
According to Brian Gardner of consultancy firm Agra Europe, the idea that the UK would switch a big chunk of its savings from EU membership into some kind of "modified CAP" is "highly risible". He reckons the agricultural sector would be lucky to get about a third of the current level of subsidy, in the form of a "very much cut-down nationally operated support policy" worth about £1bn a year. Agra predicts that a stand-alone UK subsidy regime would focus on regional development and environmental objectives. In England and Wales, this would mean the bulk of subsidy paid to landholders in the hills and moorlands and little or nothing to lowland farmers, while Scotland could maintain much of its existing subsidy structure.
Agra's conclusion? As things stand, Brexit would mean massive cuts in farm incomes, land prices would fall, and vast numbers of farmers would go out of business. On the other hand, such a gloomy prognosis assumes that the UK would take no transitional measures to help shore up its food security and given that the UK currently relies on its own farmers for 62% of its food needs, that's highly unlikely.
The benefits of Brexit
Brexit would allow the UK to support its own farmers in whatever way it sees fit, without subsidising EU competitors at the same time. And it would free UK farmers from some of the 2,715 EU laws that govern the CAP and the further 1,918 that govern the environment and food safety (according to the NFU). No doubt any deal to retain access to the single market on favourable terms would involve abiding by some EU legislation. But pro-Brexiteers, such as Owen Paterson, point in particular to the dumping of the EU's overly restrictive "precautionary principle", which allows the EU to ban anything "on a whim" such as neonicotinoid pesticides and yield-boosting GM technologies.
Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
Lloyds, Halifax and Bank of Scotland to shut another 45 branches
Lloyds Banking Group, which includes Halifax and Bank of Scotland, is set to close a further 45 branches in 2024 - find out if a branch near you is closing.
By Vaishali Varu Published
US stock trading app Robinhood launches in the UK
The low-cost trading platform has opened another waiting list for British investors - following two failed attempts to launch in this country - and is hoping to be fully operational next year.
By Ruth Emery Published