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Risk of substantial farm income reduction in the absence of a Brexit Trade Deal

A new report, by economists at Teagasc, estimates that the average family farm income (FFI) in Ireland increased by 6 per cent in 2020.  A key driver of this increase has been a reduction in animal feed, fertiliser and fuel prices, along with additional subsidy supports for cattle producers to alleviate the negative effects of COVID-19 on the beef market.

The Teagasc Outlook 2021, Economic Prospects for Agriculture, is published today, Tuesday, 1 December at the annual Teagasc Economic Outlook Conference, taking place online.

There were concerns early in 2020 that COVID-19 restrictions around the world would hinder food trade and lead to a reduction in global food demand. However, the actual impact of the agri-food sector was minimal. Due to the pandemic, food consumption outside the home has fallen substantially, but this has been largely offset by increased consumption at home. Internationally, agri-food trade proved quite resilient in spite of the restrictions.

However, the lockdown measures did lead to restrictions on marts, a short term contraction in beef processing and lower beef prices. Additional support was made available to the Irish beef sector due to the impact this had on farm level cash flow and short term profitability.

On the positive side, production conditions for grassland agriculture in 2020 were relatively normal in Ireland, with only small changes in purchased input usage.  Lower input prices, therefore led to a reduction in production costs on dairy, beef and sheep farmers in 2020.

By contrast, some Irish cereal producers had to deal with severe adverse weather conditions in 2020, which led to a substantial reduction in cereal yields on some farms, only marginally offset by higher cereal prices.

Milk prices in 2020 were equivalent to those in 2019, while beef, sheep, cereal and pig prices all increased. The milk, cattle, sheep and pig sectors also recorded production increases in a range of 2 to 4%, while cereal production fell by about 20%.

The average income on dairy farms is estimated to have increased by 5% in 2020, benefitting from lower production costs, stable milk prices and a further increase in milk production. By contrast, the average income on tillage farms is estimated to have fallen by 11%, largely reflecting a sharp drop in cereal yields in 2020. This fall in average cereal incomes belies the more significant drop in income in parts of Ireland worst hit by adverse weather conditions at sowing and harvest time.

In 2020, the average income on cattle rearing (suckler) farms is estimated to have increased by 17%, while the average income on other cattle (predominantly finisher) farms was unchanged on the 2019 level. All beef farms benefitted from lower production costs, but the outcome for cattle rearing farms was better than that for other cattle farms due to the difference in beef price movements for younger and finished cattle.

Looking ahead to 2021, no major movements in international agricultural commodity and agricultural input prices are foreseen.  While there have been positive developments with respect to a number of COVID-19 vaccines, further disruption to economic activity due to the pandemic cannot be ruled out, as the COVID-19 vaccination process represents a major logistical task that will extend well into the second half of 2021.

Considerable uncertainty exists due to concerns about future EU/UK trade, once the UK’s Brexit transition period ends on Dec 31st of this year. Irish agriculture faces an enormous challenge in 2021 if no post Brexit trade deal emerges.

The absence of a trade deal would mean that sizable tariffs would apply to imports, which would have major negative consequences for the extent of EU/UK agricultural trade. Aside from tariffs, which might be avoided in a trade deal, there will be additional trade costs, such as customs and regulatory checks, which will be inevitable as the UK leaves the Single Market.

With the imposition of tariffs, Irish exports to the UK would decline and output prices are projected to fall by almost 20%, 8%, and 7% respectively for cattle, pigs and milk in 2021. By contrast, Irish lamb prices are projected to rise by 7% in 2021, as the exclusion of UK lamb exports from the EU lamb market would lead to an increase in EU and Irish lamb prices.

International prices for cereals at harvest 2021 are expected to be slightly lower than 2020 harvest prices overall, due to projected increases in supply. However, given that Ireland is a net importer of cereals, the imposition of tariffs on grain imports from the UK, could offset some of the otherwise negative impact on Irish cereal prices in 2021.

In the absence of a trade deal, the largest income reductions in 2021 would occur on Irish beef farms, where the average income could drop by 40%. The average Irish dairy farm income could drop by 13% in 2021. Even though Irish lamb prices are expected to increase in 2021, the average sheep farm income would still fall by 4% in 2021, as many sheep farms also have a cattle enterprise which would experience significant losses. A recovery in cereal yields in 2021 would be sufficient to offset a fall in cereal prices, leaving the average cereal farm income up 3%.

Under this no trade deal outcome, the average family farm income in 2021 would decrease by 18% to €20,200.  It is projected that this would amount to an income reduction in excess of €690m for the agriculture sector in aggregate in 2021.

This no trade deal Brexit scenario assumes that no additional support is made available to the agriculture sector to address the impact on incomes of the reduction in output prices that would occur. However, it is likely that additional support would be provided by the EU and the Irish Government and the forecast provides an indication of the amount of money that could be required to offset the potential income reductions across the sector.

The Teagasc Outlook 2021, Economic Prospects for Agriculture, is available to view at   https://www.teagasc.ie/news–events/national-events/events/outlook-2021-conference-.phpI

Image courtesy of the The Irish News

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