Britain is due to leave the European Union on March 29, 2019, but with no deal on the withdrawal agreement that has to come before talks on a longer-term trading arrangement, the basis on which the United Kingdom’s flour milling industry will be doing business from next spring onward remains unclear.

There are, however, a series of possible outcomes and the Agricultural and Horticultural Development Board (AHDB) has set out the likely effects of those alternatives on the grain processing sector.

The report, based on a longer paper produced by a group of outside experts, was prepared by Amandeep Kaur Purewal, senior analyst, AHDB Market Intelligence. Speaking to World Grain, she highlighted some of the problems with assessing the impact on the industry. For example, there is the uncertainty about how Rules of Origin would work in any free trade agreement.

“At the moment we’re still in the dark,” she said. “Will there be tariffs? We don’t know which sort of trade system we’re going tohave.”

She emphasized that the work AHDB has done is designed to lay out the potential factors involved.

Purewal’s summary describes the key messages of the report as being that the “U.K. flour trade is likely to experience the most disruption post-Brexit, even if a free trade agreement is negotiated,” as well as that, “the milling wheat sector is likely to face more challenges than the malting barley industry if no trade deal is negotiated,” and that “there are opportunities for U.K. malting barley/malt even under a mutual tariff scenario.”

Three possible outcomes

The report compares the effects on the industry of three possible outcomes. Under a free trade agreement, there would be the “potential to agree to zero tariffs but non-trade barriers, such as Rules of Origin, will be a factor and there will be further costs associated with customs control.” The second possibility is labeled “unilateral.” In this case, the U.K. would keep tariff-free imports, but exports would be subject to tariffs. The third involves mutually recognized tariffs. Tariffs would be placed on U.K. imports and exports in line with WTO rules. Commission President Jean Claude Juncker held out the prospect of a free trade agreement in his State of the Union address to the European Parliament on Sept. 12. He welcomed talk from U.K. Prime Minister Theresa May of “an ambitious new partnership,” and agreed “the starting point for such a partnership should be a free trade area between the United Kingdom and the European Union.”

“The Commission’s negotiators stand ready to work day and night to reach a deal,” Juncker said. “We owe it to our citizens and our businesses to ensure the United Kingdom’s withdrawal is orderly and that there is stability afterwards. It will not be the Commission that will stand in the way of this, I can assure you of that.”

The main sticking point in talks on a withdrawal agreement is the border in Ireland between the United Kingdom and the Republic of Ireland. Under the Good Friday Agreement, the 1998 deal that brought peace to Northern Ireland, the border must be kept open, with no controls. WTO rules require having customs posts on the border.

“The European Commission, this Parliament and all other 26 Member States will always show loyalty and solidarity with Ireland when it comes to the Irish border,” Juncker said in his speech. “This is why we want to find a creative solution that prevents a hard border in Northern Ireland. But we will equally be very outspoken should the British government walk away from its responsibilities under the Good Friday Agreement.”

The Commission President also made it clear why the U.K. government’s so-called “Chequers Deal” named after the British Prime Minister’s country residence, will not be acceptable. A deal only between members of the U.K. government, it calls for Britain to stay in parts of the E.U.’s single market.“If you leave the Union, you are of course no longer part of our single market, and certainly not only in the parts of it you choose,” Juncker said.

Rules of origin issue

For the flour milling industry, the Irish border issue has a major commercial significance.

“U.K. flour is only exported to any great extent from Northern Ireland (NI) to the Republic of Ireland (RoI),” the report explains. “The RoI is reliant almost entirely on flour milled in NI. The NI mills use both imported wheat and some wheat grown in both NI and RoI.” Bakeries in the Republic export some high-quality goods back to the U.K.

U.K. flour production depends on imported wheat, particularly from North America. Exporting flour from the U.K. outside the E.U. would bring Rules of Origin into play. These rules cover trade in products that contain parts from a country outside the agreement, or, as the AHDB report puts it, “these rules are complex but fundamentally define the proportion of goods in a manufactured product that may be included from a third party.”

How these rules operate makes it possible that even if there were a free trade agreement between the U.K. and the E.U., trade in flour between the two may be reduced.

“The reduction depends on too many decisions yet to be made to give a clear estimate, but there could be a reduction in exports of 30%,” the AHDB said.

Goods must originate from a country in the free trade agreement if they are to benefit from the trade preferences in the agreement and they can only acquire originating status if they are made wholly in one of the markets within the agreement, with no inputs from outside its area, or there has been “sufficient transformation” to acquirement originating status. To pass the test of sufficient transformation, the product has to be changed so much that there is a change in its tariff heading, or it has to meet specified domestic content requirements by value or weight.

“This means that U.K. products, such as flour, that use imported grains, may not qualify for preferential access to the E.U. market,” the report said. “Similarly, E.U. products that use U.K. cereals and/or cereals products.”

Tariff rate quotas (TRQs) are likely to play an important role if the U.K. ends up in a situation where tariffs are applied to goods traded with the E.U. The paper explains that there are TRQs for grain, but not for flour and malt. The E.U.’s current TRQs with 28 members would have to be divided, something that has to be agreed with other countries. Getting that agreement could involve difficult negotiations.

New farm policy impact

Another potential issue arises from the effect of a new farm policy. Outside the E.U., the U.K.’s grain producers would no longer receive subsidies under the E.U.’s Common Agricultural Policy. The U.K. government has proposed, in vague terms, a new system based on payment for “public goods” like environmental work done by farmers, but there remains a concern that supplies of milling wheat and malting barley could fall as a result of the loss of E.U. support for farmers.

“While there are likely to be negative impacts arising, they are unlikely to be significant for supplies, as the farm subsidy is decoupled from production,” the paper said. “Nevertheless, any loss of subsidy may influence farm structure, land occupation costs and farm employment.”

The change in system might cause disruption and land may be lost to grain production as farmers move to a more market-related activity, although taking away subsidies should not change the relative profitability, and, therefore, the mix, of crops. In some sectors, notably horticulture, strong concerns have been expressed about the availability of labor outside the E.U.

The unilateral removal of tariffs by the U.K. would have the advantage for millers that there would not be a substantial increase in the cost of importing milling wheat, while feed wheat prices would be expected to fall by about 3% because of export tariffs. AHDB forecasts an oversupply of flour of about 240,000 tonnes, with the biggest impact in Northern Ireland.

A system of mutual application of tariffs would mean a zero-tariff applied to top-quality wheat imports, which means that they would continue and could rise. However, the AHDB experts do not think that the E.U. would be able to supply enough top-quality wheat of sufficient quality to qualify for the zero tariff, so imports of E.U. wheat at the non-country specific €12-a-tonne Tariff Rate Quota would be likely. There would be the potential for an increase in U.K. milling wheat premiums, because the price of imported wheat would likely be higher.

This scenario would leave flour production “severely hit,” the paper said, citing an expected low of 235,000 tonnes of exports to the E.U., 188,000 of which are currently exported to the Republic of Ireland. It would be likely that one or two mills would close, at least one of them in Northern Ireland. Until those mills close, there would be major overcapacity problems across the industry.