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This is a transcript of episode three of the Down to Agribusiness podcast. Visit the show page here.


Brexit negotiations begin: What are the impacts on agribusiness and animal health?

Adam Sharpe
Hello, and welcome to the latest Down to Agribusiness Podcast, from Informa Agribusiness Intelligence. I’m Adam Sharpe. We’re recording on the day that the UK and EU commence the so-called Article 50 negotiations that will determine how the UK exits the European Union, and what the future relationship between the two will be. The UK notified the EU of its intention to leave the bloc at the end of March this year, kicking off a two-year window for talks, that will expire in 2019. Despite this already narrow timetable, the Conservative-led government decided to call a snap general election, to try to, in Prime Minister Theresa May’s words, ‘Strengthen the hand of the government,’ going into those crucial talks, and called on the electorate to give its backing to the approach her administration had set out.

But that gamble backfired. While still the largest party in Parliament, the number of Conservative MPs elected fell by twelve from the last election in 2015, to 318, which is eight short of being able to form a majority government. Theresa May has since entered into negotiations with the Northern Irish DUP party, and its ten MPs, to secure a confidence and supply arrangement that would ensure the now-minority government will have enough votes to get its legislation through the House of Commons. So, far from the ‘strong and stable’ administration that the Prime Minister called for prior to the election, she’s in a much more precarious situation, both personally, in terms of her own position, but also in terms of her government, and its ability to proceed with its agenda without compromise.

But what does all that mean for the agribusiness sector? I’m joined by Chris Horseman, editorial director for IEG, to discuss this and more. And then, later in the podcast, I’ll be speaking to Joe Harvey, editor of Animal Pharm, to talk about the impact of Brexit on the animal health sector. Chris, much has been made of the UK government’s tactics, when it comes to these talks. What are the desired outcomes for Brexit, for David Davis and his team of negotiators, and how does this differ from what people are describing as a ‘softer’ approach to leaving the bloc?

Chris Horseman

Well, I suppose, in a sense, the UK government’s approach can be defined most accurately by what it isn’t trying to do. It has said that it won’t be seeking to keep the United Kingdom within the Single Market of the EU, and it’s also planning to take Britain out of the Customs Union, which has implications for the way imports and exports are handled. So, those are two things which David Davis and the British government have said that they are going to pursue. Instead, they’re going to go for the most comprehensive possible trade agreement with the EU, as seamless as possible, to use the preferred jargon at the moment, and they also intending to resolve, as quickly as possible, the questions around the rights of EU nationals living in the UK, and vice-versa, and to deal with the thorny question of how much money the UK may have to pay the EU, at the point at which it leaves, so that, as quickly as possible, Britain can start negotiating the detail of that future trade agreement.

Adam

And how is the European Commission, through its lead negotiator, Michel Barnier, how are they approaching the talks? I understand they’ve got different views on the timetable for negotiating the UK’s exit.

Chris
Yes, the timing, the choreography of this whole thing, is becoming, sort of, quite a story in itself. Monsieur Barnier has said that he wants to see progress on the Commission’s three primary priorities, which are the question of the rights of UK nationals in the EU, and vice-versa, the question of money, settling the bill, and also the specific issue of what to do about Northern Ireland, and the border with the Republic of Ireland. Only when there has been, in his words, ‘Sufficient progress,’ on those specific points, is he prepared to talk about the future relationship, and the trading deal, between the EU and the UK, something which has frustrated the British government, until now.

Adam
So, with the DUP now playing the role of kingmaker, in forming the new government, what is that party’s outlook on Brexit? Does the fact that Northern Ireland have a land border with the EU have a bearing on its Brexit strategy?

Chris
I think it does, yes. The whole question of the Irish border is an immensely sensitive one, for people in Ireland, both north and south of the border. The last thing anybody wants is for a reintroduction of border posts, not just for, sort of, economic and commercial reasons, but because of the memories of the Troubles in Northern Ireland, 20, 30 years ago. These memories are all, sort of, quite tightly tied up with the issue of that border. The DUP is actually quite a Eurosceptic party, and it agrees with a lot of the approaches that the Conservative government is taking. But, to the extent that they are able to influence government policy on Brexit, I think they will be arguing for the most open border possible, between Northern Ireland and the Republic of Ireland, which is, of course, the only land border between the UK and the EU, once Britain pulls out.

Adam
So, with the UK leaving the EU, its farmers will also be leaving behind the Common Agricultural Policy, and the direct payments that go with it. The UK also sends the majority of its agri-food exports to the EU, and is heavily reliant on imports of a number of agricultural items in the other direction. What is the position of farming and agriculture groups, going into these talks?

Chris
The primary thing that I think they are pressing for is for the best possible continued access to the EU market. They’re very anxious that the EU market, which accounts for some well over 60% of total UK agri-food exports, should remain open, and that there should be no tariff or undue non-tariff barriers to trade there. Another issue of concern for a lot of farmers is the question of access to labor. At present, a lot of British farms work on the basis of being able to pull in seasonal workers from other countries in Europe, to help with harvesting and so on, and there is concern that if immigration rules are significantly tightened up, then there could be increased barriers to doing that, and possibly increased costs. So, those are two things which farmers’ organizations are pressing for, in particular.

Adam
So, as we’ve mentioned, the UK’s leaving the CAP. So, a new UK domestic agricultural policy will have to be formulated and replace it. How do you think this new policy will differ from what is currently being offered by the CAP?

Chris
Well, this is a very interesting question. At present, there’s very little clarity from the UK government. There were one or two hints dropped before the election. Of course, now that there is a new government, it remains to be seen exactly what difference that might make. There will, undoubtedly, be more of a focus on delivering environmental goods, of making policy work for improving ecosystems, and so on. That’s clearly going to be a focus. Supporting farmers in upland areas, too, has been identified as a priority. One very important question is whether the UK will continue with the CAP approach of the last 20-odd years, of paying farmers subsidies based primarily on the area of land that they control. There have been numerous suggestions that the UK could move away from that approach, which a lot of reformers would view as being a good thing. But, of course, one should never underestimate the lobbying power of the farmers and landowners’ organizations, many of whose owners would be negatively affected by any move away rom that payment per hectare approach, that the CAP has taken until now. So, in terms of agricultural support policy, I think everything is up in the air.

The other thing that the government has committed to is to, wherever possible, remove the burden of red tape on farmers and agribusiness. I think it, certainly, will be a priority of the UK administration, to make it easier for farmers to apply for grants, subsidies, whatever comes out of the reforms which lie ahead. This has been flagged up quite clearly by the outgoing DEFRA secretary, Andrea Leadsom. We’ve yet to hear Michael Gove’s view on the subject, the new, incoming, Environment Secretary, but one suspects that his views will be quite similar. But, of course, when it comes to product safety, and the, sort of, consumer-facing red tape, if one can put it that way, I think the UK’s margin for maneuver, in terms of deregulation, is quite limited, especially if the UK wants to continue to be able to sell its goods relatively freely on the European market, as, of course, it will want to do.

So, there are a lot of questions ahead, in terms of the formulation of future UK agricultural policy, and not least, I should add, the question of whether there is one agricultural policy, or four, because of course, the UK has devolved administrations in Scotland, Wales, and Northern Ireland. Under the CAP, the administration of current policy is devolved, to a significant extent, between the three regional administrations and DEFRA, representing England, and there will no doubt be a considerable amount of argument, and that argument has started already, as to the extent to which future UK agricultural policy will be devolved between the UK nations.

Adam
So, lots of questions, still, around the future of UK agricultural policy, but alongside this, the EU has already started the process of reforming the current CAP, which ends in 2020. Will the UK’s exit have a major impact on things like funding, structure, and the aims of that policy, going forward?

Chris
I think the most direct impact will be the area of funding. Depending on how you calculate it, and it is a desperately tricky thing to nail down anything to do with the EU budget, but roughly speaking the UK net contribution to the CAP is in the area of €1.5 billion a year. So, from 2021 onwards, the EU will, in principle, either have to make do with that much less money per year to spend on the CAP, or the contributions of the other 27 countries will have to be increased accordingly, and that’s one of the things which the EU will have to decide, certainly from the start of the next CAP in 2021, onwards. I think the EU will be looking with considerable interest at the way the UK formulates its future agriculture policy. It’s not beyond the realms of possibility that, if it comes up with policy ideas which clearly make sense, and clearly are starting to work, then the EU might want to emulate, or perhaps nick some of the ideas which the UK come up with.

But, of course, the timelines are fairly tight, with Brexit, in principle, happening in 2019. There may well be a, sort of transitional phase before Brexit is fully consummated, and the EU will have to decide and put into law a new CAP well before the end of 2020. So, perhaps the compare and contrast operation won’t actually be able to come into effect until later on in the process.

Adam
So, some interesting times ahead, much still to be decided. Thank you, Chris. As we’ve been discussing, the impact of Brexit will be felt far and wide across the agribusiness sector in the UK. One of the industries with particular concerns is animal health. Sales of veterinary medicines in the UK exceed £700 million annually, with medicines to prevent diseases in animals accounting for the majority of this figure. Just over 40% of this total sum is accounted for by the food production sector, with the main groups of medicines sold including vaccines and antimicrobials, or antibiotics, as they are more commonly known. As with almost every industry in the UK, the animal health connections with the EU are strong, and there will need to be a period of adjustment prior to Brexit. But with much uncertainty over the direction of the UK’s Brexit strategy, particularly after the result of the general election, businesses have many questions. I’m now joined by Joe Harvey, principal analysist at IEG’s Animal Pharm, to discuss some of the issues that are causing headaches for executives.

Joe Harvey
Yeah, thanks. You point out the size of the UK animal health industry there, and I think it’s quite interesting to note that, you know, you mentioned the £700 million figure, of the industry. Actually, that’s quite a relatively small animal health industry, if you compare it to something like France or Spain, or something huge like the US or China. But, the UK has really got particular expertise in the regulatory side of veterinary medicines, and bringing animal health products to market. And so, whereas the UK industry for these products is quite small, and personally I don’t that’ll be changed that much by Brexit, or there won’t be much of a benefit or a hindrance, the regulatory expertise is a real area of issue. So, that’s definitely something to consider with the Brexit negotiations.

Adam
So, one of the main areas for concern is that fact the European Medicines Agency, which handles market authorizations for the EU as a whole, is currently located in the UK, but that’s likely to move before the end of the Brexit process. Why is the issue of market authorization such a concern for the UK industry?

Joe
Yeah. So, each year, I go over to the EMA headquarters, and they’re currently in London, and they’re in Canary Wharf. And, each year, I get an update from the veterinary medicines experts there, and a lot of them are from the UK, and they are UK experts from the regulatory agency in the UK. And, as I just mentioned, there is a lot of expertise there. And, possibly not next year, but we’re thinking the year after, the EMA’s headquarters is gonna be elsewhere, and the new host nation, so the host nation currently the UK, but the new one will have to play, it’ll have a leading role in the authorization of veterinary medicines in the EU, and it’s gonna need to have the expertise already in place. It’s gonna need the infrastructure. And, of course, there’s lots of countries out there that can do this. There’s lots of cities ‘round the EU, but the whole thing the industry wants, and I’m sure these are buzzwords that are mentioned with Brexit, but there needs to be a smooth transition, going from London to, you know, wherever it’s gonna be, Brussels, Copenhagen, Dublin, Paris. These are all places that are mentioned.

There needs to be continuity, and a smooth transition, and the UK will continue to play a relevant part in the regulatory process. This expertise isn’t suddenly, just, going to disappear because the headquarters aren’t in the UK. But, to the second part of your question, ‘Why is the issue of market authorizations of products such a concern?’, a lot of what we write about on Animal Pharm, from a policy and regulatory point of view, is the current amount, and I’m talking five years ago, now, five years in the future, the amount of regulatory burden companies have when bringing a vaccine or an antimicrobial to market. There’s a lot of burden already, and the authorities are trying to decrease this red tape. So, this is already happening, and from my point of view, it seems like Brexit is just gonna add a whole lot more red tape, on top of the issues that companies already have to deal with.

Now, we’re actually publishing an article today, it’s an opinion piece from a veterinary contract research organization, which are based in Germany, called Klifovet, and they told us that-, so, if you take this from a UK perspective, companies operating from the UK, now in the UK animal industry, there are not huge companies, but there are four or five in the top 30, and these companies are expected to face challenges, more challenges, possibly, than the companies on the continent. And so, if you bear in mind, you’re a UK company, and you want to bring a new product to market, you are going to have to then bring a product to your home market, and then now, suddenly, you’ve got 27 other member states that you need to do a separate regulatory process for. Companies that remain within the EU, they have one step for their 27 member states, and now they can decide, ‘Well, we can do the extra legwork, to bring the product to the UK, which isn’t our home market, and maybe isn’t our core focus.’ So, it seems like there is gonna be extra burden for the companies within, and I mean companies headquartered within the UK.

Adam
So, extra burdens on the industry. Can, for example, UK companies expect to see more inspections and audits from the UK for their products, post-Brexit?

Joe
I don’t think so. I think the hope, so everyone will have all their fingers and toes crossed, but the hope is that the systems within the individual countries, if it’s the UK, the actual regulatory guidelines stay the same, it’s just the, sort of, duplication of work for UK companies. Because, previously, you get your approval for a product in Europe, and that covers the UK. UK animal health companies’ regulatory teams are now gonna have to be doing double the workload to then get their vaccine, or whatever, then approved for all the other member states, and, as I said before, they’re some big markets. There are bigger markets in the member states than there are in the UK. I think UK-based companies, and these are companies such as Dechra Pharmaceuticals, Eco Animal Health, Animalcare, Norbrook Laboratories, they’re gonna need to, now, if they haven’t already, have a subsidiary in Europe, on the ground, in one of the leading countries. Whether it’s in France, Germany, or somewhere politically centered, like Brussels, they’re gonna need to have a subsidiary or a partner, partnering company, in Europe, to help them deal with this work.

I mean, there’s so many aspects to look at this from. Companies that currently don’t sell any products in Europe or the UK, say a Japanese, or a Chinese company, that were thinking about operating in Europe, they’re going to have to now think, ‘Do we need a subsidiary in the UK? Actually, we need one in the UK, and now we need one, also, in an EU country, as well.’ And so, from a business point of view, I think actually last week, we saw the leading Japanese animal health company set up a subsidiary in the UK, and it’s not for me to question that, but do you want to be setting your European subsidiary in the UK now? Maybe they’ll feel isolated there, but it all depends on what products you’re bringing to market. Maybe this Japanese company thinks, ‘Our products are particularly suited to the UK, we need people on the ground in the UK.’ If companies think the opposite of that, they’ll probably move any offices they have from the UK abroad, or if they have no presence, they’ll go straight to having a presence on mainland Europe.

Adam
So, hypothetically speaking, if a company has a product, they want to license it for use in both the UK and the EU, what will they, potentially, need to do in future, to achieve that?

Joe
A lot of work, I reckon. The process for getting these products on the market, I don’t think is going to change much. They are just, potentially, gonna have to employ more people, to do this paperwork. When I talk to companies about the regulatory situation in Europe, they always mention we need to reduce the amount of burden we have, doing our admin, and this just seems like it’s gonna create more, which frustrating for the UK companies, I think.

Adam
And, finally, with freedom of movement seemingly one of the UK’s red lines, going into the Article 50 negotiations, is the animal health sector particularly exposed to the potential loss of workers from the EU?

Joe
It’s a matter of opinion, but my opinion is every industry could be. I think the British Veterinary Association has looked to the UK government, to sort of safeguard the jobs of European-born vets, working in the UK. So, I think this might be quite a good example, that the UK has to look to Europe for a substantial amount of expertise in the veterinary medicine sector, and without these vets, they’re gonna be missing out, and they need to safeguard these vets’ jobs, and keep them within the UK. I think the animal health industry, to a degree, might be quite similar. I mean, a lot of the cases, actually, the UK companies do have a European presence, so they’re able to, sort of, I don’t know, if they need to move expertise over to their European offices, outside of their bases in the UK, that might benefit them. But, I think this uncertainty is something across every industry at the moment. ‘Where will our employees be, in the next two years? Where will our core of expertise? Will they be sat in the same office as us, or are they gonna be over the seas, on the continent?’

Adam
For the latest news and analysis on the animal health sector, follow @animalpharm on Twitter. And, if you have any questions or comments on this podcast, you can also tweet using the #DowntoAgribusiness hashtag.


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