Economics of the tillage sector:Possible Brexit Implications

Thorne, F., Donnellan, T. and Hanrahan, K.

National Tillage Conference,30th January 2019

Overview

2

Present

• Relative tillage sector income and direct payments

Future

• Where we are going in terms of the farm gate?

• Special focus on Brexit

3

Past trends… at the farm gate

Prices

Commodity Price Trends- Output and Input Prices

Prices trending upwards

• Outputs and Inputs

Items to consider

• Trend in outputs versus inputs

» Grain versus fertilisers

» Inputs rising faster than outputs

Source: FAPRI Ireland

0

50

100

150

200

250

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Pri

ceIn

dex

(19

90

=1

00

)

Feed barley price Nitrogen price

Linear (Feed barley price) Linear (Nitrogen price)

4

Farm level area of cereals

Area devoted to cereals is

decreasing over the past 3

decades

But very evident since 2012

Source: CSO

200

220

240

260

280

300

320

340

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Hecta

res

('000)

Total wheat, oats and barley area

Total wheat, oats and barleyLinear (Total wheat, oats and barley)

5

Farm level area of cereals

Area devoted to cereals is

decreasing over the past 3

decades

But very evident since 2012

• Decrease in trend line in later time period

Source: CSO

200

220

240

260

280

300

320

340

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Hecta

res

('000)

Total wheat, oats and barley area

Total wheat, oats and barley

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Present Situation at the Farm Gate in Ireland

Income

Direct Payments

7

8

Situation in 2017

Source: Teagasc, National Farm Survey

86,115

37,158

16,897 16,65112,680

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Dairy Tillage Sheep CattleOther

CattleRearing

€p

er

farm

Family Farm IncomeDefinition of Family Farm Income

- Return to all owned resources on the farm

Specialist tillage farms in 2nd place,after dairy farms

Some recovery in 2018, but still in 2nd

place to dairy

9

Situation in 2017Reliance on Direct Payments

Source: Teagasc, National Farm Survey

22%

63%

96%

114% 115%

0%

20%

40%

60%

80%

100%

120%

140%

Dairy Tillage CattleOther

CattleRearing

Sheep

Co

ntr

ibu

tio

nto

Inco

me

Specialist tillage farms have thehighest level DPs

Specialist tillage farms in 2nd place,after dairy farms, in reliance on DPs

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What About Brexit?

???

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• Brexit timeline (as things stand on Jan 30th 2019)• Withdrawal Agreement to allow transition period rejected by House of Commons

• UK will leave the EU on March 29th 2019

• A new EU/UK trade relationship at end of 2020 has been talked about

• At present, no future trade relationship in place

• Move from the current trade arrangement to WTO terms on March 30th

• Our Scenarios for Assessment (Year 2026)• Baseline: No Brexit, status quo of present

• Scenario 1: ‘No Deal’ Brexit

Brexit Assumption

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Baseline versus ‘No Deal’

Year: 2026

No Brexit

Assume all traderelations remainthe same

Assume no pricechanges due tothe policy

BaselineYear: 2026

‘No Deal’ Brexit

WTO Tariffs applyon imports andexports from/to UK

Non-tariff barriersto trade alsoassumed

‘No Deal’Bound WTOtariff rateson imports*

Wheat €95

Barley €93

Oats €89

*Except for the preferentialrates agreed for certain TRQs

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Farm Level Brexit Analysis

• To examine the potential impact of Brexit on Irish tillage farm income• Impact on the average farm• Impact on the distribution of farm incomes

• Methods• Food Agricultural Policy Research Institute (FAPRI) Ireland model• Teagasc, National Farm Survey (NFS) data• Simulate the impact on Irish prices and farm level income

• Analysis conducted at the system level• Important for understanding results

• Assumptions• Static analysis• Note on ‘what ifs’?

Price Assumptions,Baseline versus ‘No Deal’ by 2026

Factors affecting relative price change:

• Status of the sub sector:• Net importer or exporter of a product

• Trade Competitiveness• Size of the tariff if applied

• Price competitiveness

• Trade Openness• Amount of trade with the UK

• Non-Tariff Barriers to Trade (NTB)• Low digit per cent increase

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-7%

-21%

6%

5%5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

0

50

100

150

200

250

300

350

400

450

Milk Beef Sheep Wheat Barley

Co

mm

od

ity

Pri

ce,

c/l

an

d€

per

t

2026 Baseline 2026 No Deal

FFI Specialist Tillage Farms,Baseline versus ‘No Deal’, 2026

Relative income change:

• Input prices also affected:• Seed

• Concentrates

• Non tariff barriers to trade

• Remember looking at system changes (- 3%)

• Importance of beef & sheep on tillage farms

• Most severe price changes for beef outputproduced by tillage farmers

Source: FAPRI Ireland, farm level model 17

39,443 38,198

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

€p

er

farm

Family Farm Income per Farm

Baseline 2026 No deal 2026

Distribution of Income, Specialist Tillage Farms

7,360

39,443

83,262

7,086

38,198

80,722

-

20,000

40,000

60,000

80,000

100,000

Lowincome

AverageIncome

HighIncome

FFI per farm

Baseline No Deal

Source: FAPRI Ireland, farm level model 18

A brief look at cereals only……Winter wheat (Economics per ha.)

Source: FAPRI Ireland, farm level model

Relative income change:

• NOTE: looking at enterprise level here

• System decrease (last slide) becomes net

margin increase

• System income effect diluted by large

decrease in beef output

1879

443

1978

514

0

500

1000

1500

2000

2500

Gross Output/hectare Net Margin

€p

er

hecta

re

Baseline No Deal

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Other ‘What Ifs?’• Other key unknowns for the ‘No Deal’ scenario

• Long list…..

• Exchange rate movements

• CAP payments post 2020

• Nature of the modelling exercise• Partial equilibrium model versus general equilibrium model• Economy wide impacts of Brexit on GDP

• Other output and input price changes such as straw receipts?

• Structural change• Assumed price changes in this exercise do include interaction between sectors• Key assumption is that this a static analysis at the farm level• BUT structural change is extremely difficult to model

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Other ‘What Ifs?’Other Future Trade Policy Scenarios

• What about a Free Trade Agreement (FTA) scenario?• NTB to trade still to apply to imports

• What about a Unilateral Trade Liberalisation (UTL)scenario?

• UK decides to liberalise trade and reduce/ remove its import tariffs

• For the tillage sector, a net importer of cereals• Without a bilateral agreement, WTO tariffs still apply on exports from the UK to Ireland

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Other ‘What Ifs?’The Future of the CAP

• CAP Policy Post 2020• Previous Brexit analysis included changes

• Extra demands on CAP post 2020• Various different sources

• Brexit, security, migration etc

• Current figures are preliminary• But suggestive

• Matthews (2018)

• 6% reduction in CAP supports to Ireland

Source: Matthews, 2018 22

-

2,000

4,000

6,000

8,000

10,000

12,000

Pillar 1 Pillar 2 Total CAP

Member State(Ireland)

Million €'s

CAP Allocations from MFF(Current/Nominal terms)

Baseline Post 2020

Conclusions

•Present• Specialist tillage farming FFI 2nd place to dairying

•Future• Cereal enterprise net margin to increase slightly in a ‘No Deal’ scenario

• But remember the system income story not very positive

•Key Take Home Message• Productivity improvement is the key to remaining competitive

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Thank you ….

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Questions for Slido (1)

• With reference to implicationsfor the Irish tillage sector, doyou think Brexit is a:

• Good, bad or indifferent idea?

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???

Questions for Slido (2)• Due to Brexit, by the year 2026, do you think Irish cereal

area will:• Stay the same

• Increase by 1 - 10%

• Increase by > 10%

• Decrease by 1-10%

• Decrease by > 10%

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