In depth: How might Brexit impact the cost of pig production?
With Brexit negotiations influencing trading conditions, access to labour, and regulatory costs, the conditions under which the UK leaves the EU will likely influence the cost of domestic pig production. Here, we examine how the changes in input costs modelled in the recent Brexit Scenarios Horizon report, could influence GB production costs in relation to other key pig producing nations.
Earlier this month, the latest pig production costs report from the Interpig group showed that in 2016, the cost of GB pig production had become more competitive as a result of the weakening of the pound following the Brexit referendum in June. At £1.26/kg, the figure was below the EU average for the first time since 2009. Further weakening of the currency could provide an additional boost to GB competitiveness for 2017.
However, when Brexit actually occurs in 2019, pig production costs may be pushed up again. Under both the Unilateral Liberalisation (S2) and Fortress Britain (S3) scenarios, where access to non-UK regular labour is restricted, rising labour costs increase the cost of pig production. This more than counteracts declining feed costs, and also a reduced regulatory burden under the liberalisation scenario.
The increase in production costs modelled under these two scenarios is not large; 2% for Unilateral Liberalisation and 3% for Fortress Britain. In context, if the modelled scenarios are applied to the 2016 GB cost of production figure, it would reach £1.29/kg for S2 and £1.30/kg for S3. While this does push GB back below the EU average, reducing the relative competitiveness of British production costs, the impact is significantly smaller than the currency effect currently in play. The three scenarios do not allow for a Brexit effect on the value of sterling, instead holding it constant.
This is not intended to forecast exactly where GB production costs will be after Brexit, which will of course also depend on a range of additional factors not considered here. These include improvements to physical performance and, significantly, how the value of sterling develops. However, it does highlight a potential vulnerability in the sector if access to labour is restricted.
Of course, it is possible that the UK could strike a comprehensive deal with the EU, under which access to migrant labour is maintained. This situation is modelled under the Evolution scenario, where lower feed costs result in a modest decline in pig production costs. Applying this scenario to the 2016 GB cost of production figure results in a less than 1% decline, to £1.25/kg.
The risk of higher production costs may be a concern for the domestic industry, making it more difficult to compete with European and international producers. However, it is important to remember Brexit under any scenario will also likely raise importation costs due to increased trade friction. On balance, British product could therefore still become more competitive.
In the Horizon report, GB pig prices rise as imports become less competitive and decline, enabling farm business incomes to rise even when production costs increase. In reality, the relationship between UK and global pork wholesale prices at the time of Brexit will be significant in determining the extent to which this occurs, as will the ability to balance demand across the carcase. However, it does highlight the potential for British pork to become more competitive domestically, even if production costs do rise.
Bethan Wilkins, Analyst
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