What’s going to happen to food prices?

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James Faulkner

One of the main bones of contention for Brexiteers and Remainers is the potential impact of Brexit on the price of food in the UK. Brexiteers, on the one hand, argue that leaving the EU will bring down the cost of food by removing external tariffs on imports from outside the EU and doing away with the controversial Common Agricultural Policy (CAP). Remainers, on the other hand, argue that the necessity of imposing tariffs will increase food prices, given that most of our imported food comes from the EU. Who’s right?

According to the ONS, the EU accounted for 30% of all food supplied to the UK market in 2017. To put that into perspective, UK domestic production accounted for 50%, with the rest of the world making up the rest. Given that the UK relies so heavily on EU food imports, it would be churlish to suggest that Brexit does not present significant implications for the domestic food market.

The first and most obvious issue for food prices is the potential introduction of tariffs on food imported into the UK from the EU, should the UK leave without having secured a free trade deal. Under a no-deal scenario, the UK would be likely to introduce tariffs on EU food imports, as it would be unable to impose zero tariffs without extending the same treatment to all other WTO members. Given that the EU accounts for 70% of all UK food imports, under this scenario the Institute for Fiscal Studies believes that “food prices would be likely to rise significantly”

However, the flipside of this is that if the UK leaves the EU customs union and single market, it would be free to adjust the tariffs it charges on agricultural goods (the EU currently charges tariffs on agricultural goods imported from outside the EU which are generally much higher than tariffs on non-agricultural goods) and apply different regulatory standards to food imports. This could help to mitigate any increase in the cost of food imported from the EU, as it would lower the cost of food imported from non-EU countries.

Exiting the EU also raises the question of how to replace the Common Agricultural Policy (CAP). This controversial system of subsidies and quotas is a major cornerstone of the EU, costing around €58 billion a year, or around 40% of the entire EU budget. Of that, almost €3.1bn (£2.4bn) went to UK farmers in direct payments, according to the NFU. Of particular concern is the fact that UK farmers receive more than half of their income from EU subsidies, which could disappear overnight unless the UK government decides to replace them in some form or other. Some sources even suggest that the UK’s withdrawal could result in swathes of British farmers going bankrupt, as “no UK government would subsidise agriculture on the scale operated under the CAP”.

However, others argue that the disentanglement of the UK agricultural sector from the CAP offers an opportunity for modernisation and innovation. New Zealand offers an interesting example of a country where a heavily subsidised agricultural sector went through a period of deregulation and greater competition. From 1993 to 2016, productivity in the New Zealand dairy industry – measured in terms of kilograms of milk solids per hectare – increased by 62%, following the abolition of subsidies in 1985. Some believe that a similar experience in the UK could provide the spark for a new entrepreneurial revolution in UK farming.

Meanwhile, Michael Gove’s Agricultural Bill, which is making its way through the House of Commons, has been dubbed the biggest overhaul of UK farm policy since the end of the Second World War”It promises to replace the old system of direct payments to farmers with a new system of public money for public goods – rewarding farmers who undertake environmental measures rather than those who produce food. Whilst the focus on environmental issues has been met with applause from some corners, the Environment Secretary has been criticised for not prioritising food production at a time of particular uncertainty.

The other wildcard overlaying this entire affair is the exchange rate. Sterling depreciated by 13% between January 2016 and March 2017, which has already increased food prices significantly since the referendum. The question now is whether there will be a similar depreciation of the pound after the UK actually leaves the EU on 29 March 2019. Of course, this all depends on the shape of the deal (or lack thereof) that is negotiated by the UK with the EU. Should the UK negotiate a deal which is well received by the market, then sterling could rally and help to mitigate the impact of any tariffs that are introduced. However, if the UK leaves without a deal, then sterling could fall further on international currency markets, pushing up the cost of imported food even further.

As with so many aspects of Brexit, there are more questions than answers at this stage. But hopefully this article provides readers with some food for thought.

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