3 April 1998

Incomes set to fall after £ soars to ten-year high

By Robert Harris

STERLING soared to a ten-year high against the German mark on Tuesday, putting further pressure on agriculture. Farm incomes, already down 45% in the past year, are set for another fall.

Increased imports will hit the beef and sheep sector, grain values are falling and a green £ revaluation looks certain on May 3.

The £ broke through the 3.10DM barrier on Tuesday, easing back slightly on Wednesday to 3.096DM. That marks a 20% increase in the exchange rate in the past 15 months (see graph).

High interest rates are the main driving force, say experts. UK rates are about 4% higher than Europe, sucking in foreign investment. "The UK looks like a safe haven in a storm," says Charles Stewart, agricultural manager for Clydesdale Bank.

Short term, the gap may widen, says NFU chief economist Sion Roberts. "The Bank of England is not political. It may increase rates to dampen the economy."

The move to a single currency is also fuelling the £, he adds. The Euro is expected to start as a relatively weak currency, with the new European Central Bank, dominated by France and Germany, unwilling to raise interest rates.

Sterling is likely to remain strong. "There are so many factors involved. By definition it cant be undone quickly," says Mr Stewart. "It could last a couple more years."

The current situation highlights the dangers of UK agriculture remaining outside EMU, says Mr Roberts. "A fair value for the £ is 2.5-2.7DM. But the £ will weaken only when the Bank of England is convinced the whole economy is not overheating."

Eventually, the European Central Bank will raise interest rates to cope with economic expansion of new member countries.

That could coincide with a weakening of sterling when the UK government decides on a single currency joining date, since interest rates will converge with Europe.

The soaring pound is driving prices down, says Allied Grains Hugh Scryver. Old crop feed wheat fell by £4 last week to about £66/t. Harvest movement wheat is now valued at mid-high £60/t, November sales in the low £70/t range.

The green pound gap (the difference between the market value of sterling and the fixed agricultural rate) stood at 7.8% as FW went to press. At that level, a revaluation of nearly 4% would be triggered on May 3, cutting the cereal intervention price by about £3.50 to £84.29/t. Arable area aid will also be affected – cereal payments would drop £9.93/ha..

Oct-Mar milk prices could also fall by 0.5p/litre. &#42