Two large manufacturers have recently waded into the Brexit debate. Airbus and BMW have Europe wide factories and complex supply chains. Their concerns revolve around logistics planning and how Brexit will impact their production and sales costs. We have also seen from the recent CO2 production interruptions how supply issues can quickly escalate.
Planning for Brexit
All businesses utilise inputs/energy, produce outputs and use machinery/equipment (even if that equipment is just a laptop and a printer). Farms are no different, so how can farms plan for the Brexit transition?
Inputs / energy represent the biggest, recurrent annual cost to most farm businesses (after land and finance). It will come as no surprise that the UK is not self-sufficient in inputs. Inputs also account for large indirect energy costs: fertiliser production is very energy intensive and many crop protection products are also produced from petroleum feed stocks. Therefore many inputs are very dependent on the price of oil. Oil is priced in dollars so the dollar exchange rate will influence the cost of running a farm. It also looks likely that various tariffs will be imposed post Brexit further increasing costs.
Consider buying forward
Farms should already be using inputs as efficiently as possible, only buying what they need. However, without a crystal ball, it is impossible to see past March 2019 in order to assess what impact Brexit will have on availability and cost of inputs. Farms should review where they obtain their inputs and consider buying forward, especially if delivery can be before 29 March 2019. If buying forward for delivery after Brexit you should consider the terms of the contract carefully to check that the trader is not passing the cost of tariffs onto you, particularly as tariff rates are unknown at this point. Failure to check may result in a nasty surprise when the bill arrives in the post.
Review your investment strategy
Many farms will be considering whether to invest in new buildings or machinery. Hopefully this will be guided by the overall farm strategy governing capital expenditure. There are a number of points to consider when making large expenditure decisions. For instance in the case of buildings, with the recent US steel tariffs, it may be sensible to delay making a decision to see how the price of steel develops. It is also possible that the market for UK produced steel will be severely compromised post Brexit making steel framed buildings an attractive investment now. If the equipment (for instance grain handling equipment or robotic milking machines) to be installed in the new building comes from Europe, or further afield, then it may be cheaper to order it for delivery before March 2019 rather than gambling on the prospective tariff regime after Brexit which may make such an investment prohibitively expensive.
Availability of spare parts
The other crucial issue to consider when buying any piece of machinery or equipment is the availability (and cost) of spare parts post Brexit. Machinery assembled in this country might be a safer bet than machinery imported fully assembled because the manufacturer will be determined to ensure their supply chain remains operational provided, of course, that the final assembly is not moved out of the UK. However, it is worth quizzing the dealer on their Brexit plans and what impact, if any, they might have your business before making any significant capital purchase. If you are reliant on a particular piece of machinery, such as a combine, consider servicing it before 29 March 2019 to ensure parts’ availability, understand from the dealer what the impact of Brexit might be on spares, and consider buying in anything relevant early. There is nothing worse than a major break down in the middle of a critical farm operation where the machine is out of commission for an extended period. Sod’s law also dictates that if this happens the weather will be catchy as well!
Delayed impact of Brexit
Brexit is only 9 months away (and we still don’t know what it looks like) and time is running out fast. However, most farms have already planned next year’s production. Brexit comes mid-way through the agricultural year and only a few days before many farms’ 31 March year end. The true impact of Brexit on many farm businesses will not be known until after the end of the March 2020 financial year, and even then it may be some months after that when farm accounts are prepared in time for tax returns in January 2021. Brexit might feel rather theoretical at the moment, particularly with the Cabinet still wrangling over the government’s negotiating position, but to avoid the cold reality of ‘known unknowns’, farmers would be encouraged to include the Brexit factor in all their forward planning - as much as they sensibly can of course.
*Quote from Roald Amundsen; it seems strangely appropriate!