Hard Brexit could turn EU to Ukraine for wheat, rather than UK

13.10.2016

A so-called "hard" Brexit could see Ukraine usurp the UK in wheat exports to the European Union – forcing British cereals farmers to seek Asian markets, and potentially turn to other crops.

Jack Watts, lead cereals and oilseeds analyst at the AHDB bureau, said a "key risk" for British grain farmers was to find themselves at a disadvantage to Ukraine peers in wheat shipments to the EU, if the UK choses one of the more severe options for its divorce with the bloc.

Should Brexit see the UK quit Europe's single market - rather than chose one of the so-called "soft" options allowing free access, at the expense of allowing free labour movement – the country could see its grain exports to the bloc subjected to import levies which exceed E90 a tonne for many crops.

For both wheat, of which the EU buyers accounted for 80% of UK exports last season, and barley, for which the bloc took 63% of UK sales, the tariff would represent more than half the value of supplies, at 2015 prices, and would probably render such shipments "uneconomic".

Meanwhile, Ukraine is seeing its access to the EU cereals market boosted by tariff-free import quotas introduced as a measure of solidarity after Russia annexed Crimea, and of which the terms are set for continued improvement.

'Much more preferential treatment'

Indeed, a hard Brexit agreement could mean Ukraine ends up with "much more preferential treatment" than the UK in exports to the EU, Mr Watts told reporters at the AHDB's grain market outlook conference in London.

And this when Ukraine supplies are already highly price competitive, boosted by the country's relatively low production costs.

The conference heard separately, from Samuel Balieiro a researcher at Germany's Thuenen Institute, of Ukrainian production costs, including land costs, of $100-160 a tonne at farms the institute covers, compared with $220-250 a tonne in the UK.

In fact, the UK costs were the highest of eight countries, including Australia, Germany and the US, on which Mr Balieiro presented data to the conference.

Move towards self-suffiency?

The implication for the UK might be that it is forced to "find markets outside the EU" for its grain exports, such as the growing Asian markets, Mr Watts said.

However, this process which was likely to lead to downward pressure on UK cereals prices, given the need to compete with low-cost competitors such as Russia, and tempt many British growers to switch to alternative crops – including those that the UK imports.

Indeed, farmers may find an "increased incentive to provide what is needed in the domestic market", he said, and exploit the fact that other things being equal, imported goods, in including transport costs, are typically more expensive than the equivalent produced domestically.

For wheat, the difference between so-called import parity and export parity is about £20 a tonne.

'Key question'

In fact, the language so far suggests that the UK could end up with a trade deal with EU similar to that the bloc has with Canada and the US, said David Swales, the AHDB's head of strategic insight – a hard, although not extreme, Brexit option.

That risks increased costs of trading with the European Union – which buys two-thirds of the UK's £80bn in food and drink exports - and hindrances such as "extra checks, paperwork" too, Mr Swales said.

How a post-Brexit trade deal in ag with the EU works out may depend on whether the government is willing to sacrifice interests in sectors such as food to prioritise sectors such as financial services and pharmaceuticals in which the country is particularly strong.

"A key question is where does the food and ag sector sit in the hierarchy of priorities" for the government, he told the conference.

This was an issue for subsidies too, and whether the government would be prepared, like countries such as Switzerland, to support agriculture by accepting higher food prices,

"I think keeping food prices down will be a higher priority," he said, flagging the potential for subsidy schemes to be replaced by crop insurance mechanisms, as operated in the US.


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