It's that time of year again when many in the farming industry take an even closer interest in the value of sterling and what is going on in the international currency markets.
Of course such things are always important and the weakness of sterling has already served the farming industry pretty well over the past 12 months.
For example, where it not for the 15% drop year-on-year, dairy farmers would be getting a milk price nearer to 18p/litre than the current 22p/litre, and arable producers would be getting just £70/t for their wheat.
But the value of sterling is even more important now as in just over a week, at close of play on 30 September, the EU commission will fix the rate at which this year's single farm payments will be converted from euros into national currencies.
The use of this seemingly arbitrary date has often been criticised in the past for making the whole process something of a lottery. But, if that is the case, then at least UK farmers seem to have hit the jackpot for a second year in a row......
In the last few days, sterling has slumped to a five-month low, making the euro worth over 90p, compared with 85p at the start of August. And that means an extra 5p for every euro of single farm payment when the money starts to flow from the Rural Payments Agency in December.
More precisely, if the conversion took place at today's (Monday's) European Central Bank closing rate, each euro of SFP would be worth 90.66p. That compares with the 79.03p that was used to convert 2008's SFPs and the 69.68p that was used in 2007.
Looked at another way, a €20,000 aid cheque would have converted to £13,936 in a British farmer's bank account in 2007, rising to £15,806 in 2008 and £18,132 in 2009 - a 30% increase over two years. Compare that with the housing market or stock exchange over the same period!
But one question that springs to mind is what does this mean for all those farmers who decided to lock into the weak sterling:euro exchange rate earlier in the year? I for one was advocating such a move at the time, both through this blog and within the pages of Farmers Weekly.
The answer is that it all depends on what rate they locked in at. But my recollection is that most were done at around the 90p/euro mark anyway. Some of those who were really quick off the mark may have even fixed at 94p or 95p - this being the rate in January and again in March - and they will be quids in. But, even those that fixed at 90p should not be any worse off, assuming sterling is still at around this level in a week's time.
But whatever rate they fixed at, they will still be in line for a considerably bigger SFP than they received last year.
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Phil,
I think tomorrow's release of the Bank of England minutes could have quite an
impact on where the pound ends up against the euro on 30 September. If the
minutes suggest further quantitative easing might be required the pound
could come under increasing pressure.
Yesterday I heard the parity word for the first time since January.
All of this is good news for UK agriculture even if the 7% of farmers in
England who opted for payment in euros and fixed their exchange rate aren't
feeling quite so smug. Or those who went down the forward contract route
with their bank.
What I think farmers need to be doing now is keeping an eye on the longer
term trend for the pound which seems like the dollar to be out of favour and
perhaps be ready to lock in.
I estimate that with a total single payment pot for the UK of £2 billion
each penny movement is worth around £23 million to the rural economy. And
that is just the single payment improvement. The benefit in higher
commodity prices is borne out by the fact that UK dairy farmers are not
dumping their milk like our continental neighbours.
Kind regards
Ian
I am going to take phils advice and take my sfp in euros whenever the euro reaches or goes over the 90p mark. Looking to the longer term i think it would be prudent of me to lock into a favourable exchange rate with my bank for next year aswell assumming that by such time the pound will strengthen in value as the recession comes to an end. One small thought though, surely all of the uncertainty regarding exchange rates the fluctuating pound and our industries reliance to an extent on exports would suggest that joining the single currency would be a prudent and indeed progressive economic strategy.
Ian (Young Farmer)
Good to see that you addressing this issue six months on, as I was out at a farmer yesterday who thought that he might be worse off having fixed his exchange rate than having done nothing.
However, as you note, whatever rate the farmer fixed at, they should still be in line for a bigger SFP than they received last year and they had taken away (at a cost) the risk of sterling strengthening and reducing their SFP.
I think Mervyn King's recent comment that a weak pound is good for the UK economy is fuel for the currency traders to drive the pound towards parity over the coming weeks.
I would not be surprised if between now and next Wednesday we see the pound fall further.