From the Editor: Brexit and Other Chaos

David FrabottaUncertainty breeds fear. Unfortunately, Britain’s vote to leave the EU created layers of uncertainty around financial and currency markets around the world. The massive short-term sell-off that immediately followed the vote has largely rebounded in stock markets, but it will be some time before questions about Brexit will stop influencing markets. While both EU and UK leadership are looking for a speedy exit, there will inevitably be some fallout that has the potential to affect crop inputs during the next year:

1) Currency markets will affect all manufacturers. The wildly fluctuating British pound and devalued euro have the potential to make sales more profitable for importers and less profitable for manufacturers in Europe if companies are doing business in local currencies. The dollar remains strong compared to all currencies, which means deals done in USD will be more expensive for EU buyers and potentially less lucrative for EU sellers, possibly putting downward pressure on already low product prices.

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2) Interest rates will remain unchanged. Maybe. Central banks around the world, including the U.S. Federal Reserve, have stated that they likely won’t make any moves on interest rates until they can better understand the effects of Brexit. The less transparent the effects of Brexit, the more likely we will see these wait-and-see policies in the financial markets. The Bank of England suggested that it will create additional financial stimulus at its August meeting, but the central bank will need to evaluate how investors will react to the first interest rate change since 2009.

3) EU legislative processes will become more protracted. The EU parliamentary process isn’t known for being quick, and that will worsen as British MPs resign their committee chairs and other responsibilities. Does UK have the right to vote during its transition? Will those resolutions be binding if UK casts a crucial swing vote? No one really knows, and that’s part of the reason the EU wants a speedy divorce. Couple that with the fact that Britain was slated to be president of the Council of the EU in 2018, and there is a potential that Britain could preside over the terms of its own exit, which will be a conflict of interest that likely won’t be tolerated.

4) British farmers will enjoy fewer subsidies. Regardless of how the UK will structure its agriculture policy, it is unlikely the government will be able to fund farmer payouts at the same level that they are funded under the EU’s Common Agriculture Policy. This might not have deep impact, but there will be some changes.

5) Regulations in UK will be more favorable for ag technology. Britain’s science-based regulatory systems was often at odds with EU policies, however many of the policies that govern GMOs and special-use exemptions for certain chemistries were left up to the member states. Brexit could open up a more robust agriculture market in the UK, a small but important one.
So many uncertainties still exist that the EU is right to call for the fastest possible solution, and it might go down in history as the most deliberate and decisive move the trading bloc has made since its inception.