By FWi staff

EARLIER this week, the Euro ceased to be an abstract currency and took on the form of real notes and coins.

George Chichester, deputy head of Strutt & Parkers farming department says this important development raises two questions.

What would be the consequences of Britain joining; and what would be the ideal rate for the UK farming industry?


 

To understand the significance of currency values, it pays to compare the trend in net farm income over the past 16 years with the Pound-Euro exchange rate over the same time (left).

While the exchange rate is not the only factor underpinning farming profitability, it clearly has a major influence.

In simple terms, the stronger the Pound against the Euro, the worse the outcome for the farming community.

The reason for this is that farming is fundamentally a manufacturing industry, reliant on export markets to determine a commodity price.

Subsidy payments are also greatly at risk from the vagaries of exchange rates, and in income terms, a severe weakening of the Pound would seem welcome.

But there is another side to the coin, and input prices in particular can benefit from a strong Pound.

This applies especially to those items geared to the import price, such as fuel and fertiliser.

On balance, however, it seems that a weak Pound is far better for UK agriculture than a strong Pound, from a revenue perspective, as long as it remains outside the Euro.

And that principle is the same if the UK enters the Euro, as it would effectively lock us in to a permanent, advantageous exchange rate.

But the matter is more complex than that. For example, one must distinguish between revenue and capital.

While a weak Pound might be preferable for profitability, a strong Pound is better for the conversion of capital assets – they will be worth more in Euros.

Clearly there are advantages and disadvantages to both sides of the argument.

It is a matter of compromise, though something in the region of 75p/Euro, compared with the current 62p/Euro, would strike the right balance.