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
6
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
10
What About Brexit?
???
13
• 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
14
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
15
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
16
-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
19
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
20
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
21
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
23
Thank you ….
24
Questions for Slido (1)
• With reference to implicationsfor the Irish tillage sector, doyou think Brexit is a:
• Good, bad or indifferent idea?
25
???
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%
26