13 March 1999

Full of euro-promise?

By David Millar

CHEAPER combines, higher agricultural returns, more equitable export trade alongside our EU competitors, agrochemicals at the same price as the French, lower interest rates…the advent of the euro promises much for UK farming.

And, the reality may not now be all that far off if the Government follows through with its clear intention to be part of economic and monetary union (EMU) as soon as possible after the next General Election.

The Centre for Agricultural Strategy at the University of Reading (CAS) shed some light on the euro with a conference in Reading for the UK agriculture and food industries. The common message from all speakers was to avoid sitting back and waiting for EMU to arrive in the UK, but to start preparing now for the changes it will bring in managing businesses.

"Please, please do not wait to decide your strategy on the back of British political decisions as to the right time to enter," urged Patrick Davis, chief executive of Food from Britain. The 11 countries already in Euroland take more than half of the £10bn of food and drink exported by the UK each year. They are the most likely customers for the added value foods and meals which represent the greatest opportunity for UK suppliers.

Even more compellingly, pointed out Mr Davis, a survey of retail buyers in those 11 countries showed the majority would favour either companies in the euro area or those outside prepared to commit to terms based on the euro.

A strong euro will have benefits for farmers and growers, according to Prof Alan Swinbank, of the CAS. A strong euro will keep down the price of traded goods such as grain but farmers in Euroland will be protected from price falls because intervention, area aid and headage payments are fixed in euro.

While the UK stays out, a strong euro appreciating against sterling will increase CAP prices but a strong sterling will erode the value of area and other CAP payments. There may be risks of another kind from a strong euro, warned Prof Swinbank, if euro appreciation means a wider gap between world prices and CAP support levels. This would put pressure on the EUs ability to subsidise its exports.

Ludwig Vandenberghe, head of agrimonetary policy for the European Commission, explained that UK arable farmers may be in line for compensation payments from Brussels during the present three-year transition period, initially if sterling remains higher in value than expected against the euro when the arable marketing year begins on July 1.

This is because of variation in the value of sterling – by a minimum of 2.6% – against the fixed agricultural conversion rate settled on 1 January. At the current level of sterling, arable growers would receive a compulsory compensation from Brussels but the final payment – if any will depend – on the 1 July exchange rate of the £ to the k. Over the next two years of the transition period, this compensation will be reduced gradually and the UK government will then be asked to contribute.

From 1 January 2002, there will be no agrimonetary compensation against fluctuations in current rates, but it is too early to say what the impact will be on growers, said Mr Vandenberghe.

Velcourt Group chief executive James Townshend was clear about what he hoped the impact of a common monetary system might bring for UK farmers when the UK became a member. He hoped the greater transparency in pricing brought about by a common currency would bring the prices of inputs charged to UK farmers closer to the lower levels commonly prevailing on mainland Europe. Payment for sales or aid payments from MAFF in euros would also open up a wider shopping area for the UK farmer.

For example, fertiliser spreaders, power harrows and drills common to the UK and European markets were in some instances 18-21% more expensive in the UK than in France. A UK spec combine harvester was up to 43% dearer than the same model supplied in Spain, and a Fastrac 2150 2WD costs 12% less if bought in the Netherlands.

As for agrochemicals, Mr Townshend quoted Alto and Punch C at 30-31% more expensive in the UK than bought with euros in France. Fertilisers, which are generally priced internationally in dollars, do not vary quite so much across the EU.

Jayshree Davé, of the HSBC Bank, urged farmers to plan and prepare by opening euro bank accounts in readiness for trading in euros. However, she cautioned against taking out euro loans just yet because of the exchange risk while sterling floated against the euro. Any exposure of farming or food business to currency fluctuation could be guarded against by fixed price contracts or by the insurance of entering a currency option at the cost of a premium.

Growers fixed costs are too high for comfort

COULD do better. Thats the verdict on growers fixed cost performance last year, from Nick Myers of ProCam Agriculture.

On average, his data shows that growers are spending about £500/ha (£202/acre), before they see any return (see graph). These figures are extracted from CMS computer records, gathered from growers in Essex/Cambs.

Alarmingly, many crops are not generating enough return to justify this spend on fixed costs. The graph shows which crops gave enough gross margin to stay in profit for the 1998 harvest. For the average business, pulses and linseed didnt pull their weight.

Only the top 25% of growers on ProCams data base managed to stay in profit – just – for the entire range of crop alternatives.

"The graph shows that if you could reduce fixed costs down to £370/ha – the line drawn on the left of the graph – then returns look much healthier," says Mr Myers. That target is realistic, he adds. "At £370/ha fixed costs, your business would be much better placed to survive and stay in profit, with wheat at £70/t."

Looking to the 1999 harvest, Mr Myers notes that the oilseed rape margin is likely to come down dramatically; a result of the fall in market price and the cut in area aid. "Wed expect to see it drop below wheat to lie near the barley mark."

As a benchmark, Simon Ward, research director at Bidwells, suggests labour at £86/ha (£35/acre) is possible to achieve – though difficult. Within the machinery area, repairs at £30/ha (£12/acre), and depreciation at a floor of £62/ha (£25/acre) would be healthy. Net capital machinery expenditure of not more than £69/ha (£28/acre) is advisable; consider hiring instead of buying, he says.

For economies of scale as regards labour, combine and sprayer, he reckons the optimum farm size is 730ha (1,800 acres).