NFU Scotland (ABR0007)

1. What are the key opportunities and challenges for your members arising from the decision to withdraw from the EU? Do these challenges and opportunities vary across the devolved nations?

The EU referendum result has brought the interests that UK and Scottish agriculture, and the food and drinks sector, in to sharp focus – especially in the context of trade, the movement of labour, and support.

With the EU’s Common Agricultural Policy (CAP) providing vital funding (both as direct income support and for investment, innovation and environmental management) and with tariff-free trade providing important markets for Scottish and UK produce, it is critical that UK negotiators recognise the significance of establishing the appropriate operating environment for farming as we commence our withdrawal.

Brexit presents a unique and unprecedented situation and NFU Scotland (NFUS) is keen that, as the first Member State to leave the EU, the negotiations are conducted on the UK’s terms and without trade-offs to give unfettered access to EU and non-EU markets. In addition to the right trade deal, and of equal (and complementary) importance to the future prosperity of Scottish farming, is ensuring that the right support package, properly funded, is established to replace the CAP.

The UK’s pending withdrawal puts us in unknown territory and it is recognised by most that it is impossible to predict with any certainty how the settlement on future trade, support and relationships may look – and indeed when. It is vital that the unique requirements of the four devolved nations are given equal importance in this negotiation.

a. How important is access to permanent and/or seasonal labour from the EU?

NFUS is unequivocal that the EU negotiation must ensure that the Scottish and UK agriculture and food and drink processing sectors can continue to recruit and retain workers from the EU.

Firstly, with the resident UK workforce displaying a preference for permanent employment, the seasonal nature of much of this work makes it extremely difficult to fill these roles with people based locally. It is thought that there are between 5,000 and 15,000 seasonal workers from the EU employed within the Scottish agricultural sector at any one time and not a single fruit farm could operate in Scotland without this.

NFUS has strongly advised governments to consider a return to the Seasonal Agricultural Workers Scheme – similar to the very successful scheme of that name which was in operation in the UK up to 2012 – which would allow fruit and vegetable growers to employ workers from the EU for up to six months at a time within the limit of an annual quota.

Secondly, the status of workers employed on a permanent basis is also a significant concern. In addition to the hundreds of EU nationals who are employed in skilled positions on Scottish farms and crofts, there is also a vast number of EU nationals employed within the food and drink processing sector which must not be ignored.

It is estimated by the Scottish Association of Meat Wholesalers (SAMW) that an estimated 50 percent of the workforce in some of Scotland’s abattoirs and meat processing plants are non-UK. With the Scottish red meat processing sector providing direct employment for approximately 2,700 people, the possible implications of the loss of this labour could be severe.

NFUS wishes UK Government to carefully consider its approach to any new visa scheme to bring permanent employment into the UK. There is a significant concern that a points-based system led by skills will be of little use to the agricultural food processing industry in particular. For example, having skill with knives is essential in abattoirs however this may not be considered on the same level as veterinary training in a visa process. “Unskilled” labour is also important to attract, as these workers can then be trained up. The agriculture sector needs to explain and demonstrate what it is that these varied skill-sets bring to the industry and why they are still necessary.

2. What are the positive and negative implications of leaving the Common Agricultural Policy for the UK, your members and the rural economy?

The EU’s Common Agricultural Policy (CAP) provides vital funding to Scottish farms and crofts, although it is widely recognised that the policy could be much better suited to the UK and Scottish farmers’ needs – whilst also delivering in line with taxpayer and consumer wishes.

a. Do these implications vary across the UK?

Scottish agriculture will remain dependent on continuing support payments – especially direct support in the short-to-medium term. 85 per cent of Scotland’s land is classified as Less Favoured Area; whereas the converse is true south of the Border. This presents unique challenges for Scottish agricultural businesses in terms of efficiencies and the cost of inputs.

Scotland has a significant diversity in the performance of agricultural business – between farm sizes, within sectors and across regions – and viability for many remains vulnerable as rising costs, depressed and volatile markets, and reduced and redefined support conspire to threaten the future of the industry.

The value of agricultural support payments made up around 70 per cent of average Scottish farm incomes in 2016. For particular sectors the reliance on direct support is sobering. In the dairy sector, CAP support payments made up 55 per cent of Farm Business Income (FBI) in 2016; whereas for the non-specialist Less Favoured Area cattle and sheep sector, CAP support was 231 per cent of FBI.

3. In your view, what are the critical policy decisions the Government must consider and/or implement before the UK leaves the EU?

NFUS has been explicit since the outcome of the referendum became known that the farming and food processing sectors must not be treated as expendable in the Brexit negotiations.

Any Brexit outcome that results in the UK importing cheaper food would be hugely damaging to the farming, food and drinks sectors of Scotland and the UK. Sucking in food imports also means exporting jobs and incomes in the domestic farming and food supply chain, as well as animal welfare and environmental responsibilities beyond our shores. Food production and consumption should never be based on price alone, but also provenance, quality and exacting standards.

a. Do any particular issues or challenges arise from the proposed Great Repeal Bill for your members?

b. Are there elements of the EU acquis that you would like to retain through the Bill?

See answer to question 10.

Funding

4. Would you like to see Pillar I and Pillar II subsidies replaced by UK subsidies, on what grounds and in what form?

As outlined, Scottish agriculture is heavily reliant on CAP funding and considers it essential that an agricultural policy, well-funded and targeted, is established to support the industry through what will undoubtedly be a period of significant volatility and uncertainty – not least as the UK Government negotiates new trade settlements with the EU outside of the Single Market and the rest of the world.

From 2014 to 2020, Scotland would have received around €4.6 billion (£3.5 billion) under the CAP from the EU; but following Brexit, funding from the EU to UK agriculture will stop. When this happens, the amount of money the UK decides to spend on farming and rural development will have major consequences for Scotland.

The repatriation of the CAP following the UK’s exit will create a significant debate between the UK and Scottish governments, which NFUS is seeking a clear resolution to as soon as possible. Despite agriculture being devolved to the Scottish Government since its inception, there is no mechanism within the Scotland Act 1998 that would commit the automatic repatriation of such powers to following the UK’s exit. Therefore, there is no clarity at present on whether a new agricultural policy would be reserved nor devolved.

NFUS understands that the UK Government’s preference is to establish a UK-wide framework for a future agriculture policy which would have devolved capacity to allow that policy to be tailored to fit the unique needs of the devolved administrations. However, the preference of Scottish Government is to have full repatriation of these powers, along with any budget responsibilities for funding that policy.

NFUS’s position is that agreement between the Scottish and UK government must be reached as soon as possible to allow existing CAP principles to be adhered to allocate UK funding for agricultural and rural support policies. There must be a methodology that retains at least the same level of funding going into Scottish agriculture as before, and that it be ring-fenced for agricultural and rural support in the same way as the CAP currently delivers support. Whilst significantly divergent agricultural policies across the UK wouldn’t be desired, due to the distortion this could create, NFUS would consider that the Scottish Government having the power to apply the policy to best fit the needs of the Scottish farmers and crofters it serves is sensible and proper.

NFUS understands that the UK Government will shortly publish a consultation on its 25 year plans for environment and for food and farming. NFUS will make the above case strongly in its response to that, and encourages Scottish Government to also engage strongly in this exercise.

a. The Minister of State, George Eustice MP, has suggested he would like to see a system that supports farmers who deliver ecosystems services. How would such a system affect your members?

Taking Scottish agriculture forward in a new era beyond the CAP and within new trading contexts will require a policy framework that facilitates managed change. There are major opportunities in allowing Scottish farming and crofting businesses to take up new forms of support that enable innovation, restructuring and greater market focus, but if the pendulum of support swings too quickly away from direct income then many farm businesses will not be able to cope with the rapid decline of almost certain income streams.

NFUS considers hat the objectives and principles of future agricultural support in Scotland should be geared towards a basic stabilisation of income which allows farms and crofts to meet basic standards; sustaining less favoured areas, and the remote populations they retain; fostering innovation for New Entrants and developing businesses; targeting support at active agriculture; and essentially, delivering environmental and public benefits.

Trade

5. What value and volume of your members’ trade is with the EU?  Does this vary between sectors?  Are there potential significant or new markets for your members that are non-EU?

Input Output tables[1] and HMRC data[2] suggest that food and drink exports to the EU were valued at £1,900 billion in 2015 – approximately 39 per cent of the total value of Scotland’s overseas (non-UK) food and drink exports. However, when drink exports (dominated by whisky) are stripped out, food exports to the EU were valued at £724 million in 2015 – representing some 69 per cent of Scotland’s overseas (non-UK) food exports.

In addition to this, we know that over 60 per cent of the UK’s agricultural exports are to the EU. Included within this total amount is 90 per cent of the UK’s beef and lamb exports which go to the EU, and 70 per cent of pork. In 2014, the UK exported £141 million worth of combinable crops and £383 million worth of lamb. Therefore, it is clear that trade currently has a massive impact on our farming sectors and any sudden change could be damaging to current trade flows.

6. What are your priorities for the future trading relationship with the EU and the wider world?

EU trade

For the Scottish farming and food industry, access to the EU market without barriers and any new obstacles has always been a priority. Next to the rest of the UK, Europe remains the largest destination for Scottish food exports and a market that offers a good opportunity for growth.

The Prime Minister’s address of 17 January effectively ruled out remaining within the Single Market, so what will become of utmost importance to the Scottish agricultural industry is that the Prime Minister achieves her objective of a bold and ambitious Free Trade Agreement (FTA) with the EU. NFUS wants barrier and tariff-free trade as well as the freedom to set our own appropriate rules for farming, and it is considered vital that whatever future trade deal is found for farming, food and drink is bespoke to the Scottish and UK situation.

FTAs take multi-tasking to the limit. Recent experience has seen global FTAs stall, with bilateral deals taking centre stage. However what we must consider is that different sectors of the agricultural industry will need and want different things from a trade deal - for example, for sheep producers trade with the EU is extremely important, however other commodities such as milk prefer a more domestic approach. With this in mind, the two-year timescale looks very challenging.

It is possible that interim measures may need to be put in place before we reach the end goal of the FTA. However, NFUS is clear that that interim measure must not be unilateral trade liberalisation, or the World Trade Organization default. Analysis published by the NFU[3] suggests that reverting to the WTO default position is the most damaging scenario for the profitability of British farming, adding a minimum of 20 per cent tariff. At today’s price, the effective tariff on fresh or chilled boneless lamb cuts would be 76.7 per cent if preferential access to the EU is not secured.

Intra-UK trade

The Scottish Government’s paper, Scotland’s Place in Europe, sets out various options which would effectively retain membership of the European Economic Area (EEA) and European Free Trade Area (EFTA) for Scotland regardless of the rest of the UK leaving. The paper is a valuable contribution to the debate worthy of careful consideration, but NFUS does consider the proposals to be politically and technically challenging.

Not least, moving to a EEA – EFTA model similar to that currently held by Norway, would exclude most agricultural products – requiring the sector to secure a special deal that would allow tariff-free movement of agricultural products. As yet, the capability to negotiate such deals is unknown, as is the amount of time such deals would take to ratify.

A scenario where the UK allows Scotland to settle a differentiated agreement with the EU also brings up technically difficult practical implications. There are significant questions on how such an arrangement would allow goods to be moved through the UK and then on into Europe; and what administrative arrangements would be needed to facilitate this.

With the movement of labour proving to be such a significant issue for the UK Government, it appears to NFUS that – if Scotland were to remain within an EEA-EFTA arrangement and thus bought into the principles of free movement, but rUK were to be outside of that – it would possibly create a hard border between Scotland and rUK. This is one of the most damaging scenarios for Scottish agriculture. Scotland’s most important trade partner is the rest of the UK, with some 80 per cent of produce going to England, Wales and Northern Ireland. This cannot be undermined.

International trade

‘Scottish is premium British’, and it is on this reputation of provenance and high production standards that NFUS sees opportunities in new export markets elsewhere in the world.

With the Prime Minister indicating that the UK will leave the Customs Union in order to set our own schedule, NFUS urges pragmatism in recognising the amount of time it will take to secure future trade deals with new international partners as well as the possibility that the UK may be required to pay the same external tariffs.

a. In your view, should the UK preserve the EU’s current, or adopt equivalent, standards for agricultural goods, food safety, animal welfare, pesticides and plant protections etc. as the EU?

In terms of what the Scottish food and farming sector would look to government to achieve in agreeing FTAs, NFUS would want to see:

• Equivalent standards across the board - a consistent approach must be adopted which requires potential trade partners to produce to certain standards so that the UK’s very high animal welfare and traceability standards are not undermined.
• In terms of the EU FTA, limited regulatory divergence so that no non-tariff barriers are introduced.
• Introduction of robust rules of origin requirements on produce being exported out of the UK to avoid customs tariffs.

b. How would divergence in such standards impact your members?

Divergence in these standards could result in an increase in food imports, which would be hugely damaging for a number of reasons. Not only could this damage the provenance on which the Scottish food and drink industry upholds its reputation, but it would also export jobs, income, welfare standards and environmental responsibilities away from these shores. Such a scenario would critically undermine the profitability of the sector, and food security within the UK.

7. What impact would new or higher tariffs and non-tariff barriers for exports have on your members?

As yet, it is unknown how the European Commission will adjust tariffs and tariff-rate quotas when a member state leaves the EU. Non-tariff barriers are less of a concern, as regulations and standards are likely to remain closely aligned to that of the EU, notwithstanding any changes implemented by the Great Repeal Bill.

The most significant concern for NFUS is the impact of imposed tariffs for red meat exports into the EU – 90 per cent of the UK’s beef and lamb exports currently go to the EU.

In its February 2017 paper, Quality Meat Scotland (QMS)[4] set out a range of scenarios where the loss of duty free access to the EU would result in significant market destabilisation. It states:

“The extreme position would be one where Scotland and the UK traded with the EU as a non-member state and face the punitive tariff rates […] and the likelihood of significant reduction in export volumes unless there was a significant price correction. While an agreed tariff rate quota would offer potential access at preferential terms they may not be tariff free and it would make it difficult, if not impossible, to grow exports to the EU beyond the limits of the quota.”

a. Is the impact the same for imported goods and agrisupplies?

The UK is unlikely to want to maintain high tariffs on EU food imports given its intrinsic commitment to lower consumer prices. However, its ability to do so in the scenario of an EU FTA not being agreed within the two-year window – where the pound would fall and inflation rises – is unknown.

8. What steps, if any, must the Government take to ensure that UK farmers are competitive in the global market? Do you think restrictive tariffs or non-tariff barriers on importing agriculture and food products into the UK would be positive for UK farmers?

The EU currently receives 62 per cent of UK food exports, while 70 per cent of the UK’s food imports come from the rest of the EU (2013 figures).  The UK’s agri-food sector is much more dependent on EU markets than the EU is on the UK - with the exception of Ireland, no EU country sends more than 10 per cent of its food exports to the UK.

At the same time however, the UK has a deficit in food trade with the EU of €23.2bn.  Were the UK to retain a modest tariff with the rest of the world and offer the EU duty free access, it is hoped that the EU would reciprocate because its producers would still have an advantage.

9. To what extent are agricultural products processed in the UK only?

NFUS does not possess exact statistics on the extent to which the UK has capacity to process agricultural produce before export.

However, looking at trade statistics for Scottish exports[5], it is reasonable to assume that the ‘food and drink’ statistics will correlate to Scottish agricultural produce that has been processed to the end product, whereas the ‘agriculture’ statistics will define the raw materials that are exported out of Scotland, potentially to be processed at a later date.

Balance of agriculture, food and drink trade flows

a. To what extent and how will food and agriculture supply chains be affected by Brexit? How could any adverse impact be mitigated?

The UK’s withdrawal from the EU could lead to changes in supply chains, as some UK food processors could begin to source cheaper inputs and ingredients for their products from outside Europe, but others could face much stiffer international competition as rival imports become cheaper.

Regulations

10. In repatriating agricultural policy, should the Government review, diminish or strengthen regulations that affect the agricultural sector? What examples of legislative areas/legislation merit such de-regulation?

It is the understanding of NFUS that the UK Government’s proposed Great Repeal Bill will essentially adopt all existing EU regulations en masse on the day of departure. In effect this would amount to a ‘cut and paste’, then amended within domestic legislation. This suggests that current EU regulations will be influential but not binding, which could present an opportunity to develop a regulatory system that is more appropriate or sensitive to the Scottish context which encompasses a range of production practices.

Examples of where EU regulations could be applied more sensibly to the Scottish context would be sheep tagging movements for hefted flocks; or CAP greening, which could be altered for much better environmental gains.

A further opportunity is in the realm of provenance for Scottish food and drinks produce. Whilst the challenges in the UK’s future trading arrangements are recognised, opportunities can be taken now to build upon the fantastic Scottish and British brand. Not having to comply with EU rules on food labelling or procurement policies could allow the public sector to work closely with the private sector in a unique partnership to drive an agenda focussed on healthy, home-grown food and drink first and foremost.

a. To what extent could, or should, the UK pursue a different approach to the legislation of pesticides, chemicals, plant protection, animal welfare and environmental standards than the EU?

A common argument of the Leave campaign was that a UK outside of the EU would be empowered to strip back the rules, regulations and perceived red tape that are part and parcel of our farming systems.

However, NFUS considers that, given the EU is very likely to remain as a significant trading partner, the UK might find it within its interests to align its regulations and standards closely to those in force in the EU.

It is these rules and regulations that underpin the UK’s very high standards on which we build our world-class food and drink reputation – and indeed, global standards are moving in this direction anyway.

A more relevant question would be how pesticides, chemicals, plant protection and animal welfare in particular will be regulated on a pan-UK basis. There is a significant debate still to be had on whether such powers will be repatriated from the EU – UK – Scottish Government on the day of departure, or whether they will be upheld within a UK framework.

Through the CAP, the Scottish Government has been charged with delivering that policy in Scotland. As outlined earlier in the paper, NFUS sees no reason why that should change. However, high-level regulations such as that noted above are possibly examples of issues that should be tacked collectively on a UK basis – not least for purposes of ease and policy alignment.

9 February 2017

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