16 January 1998

Strong £ and low prices here to stay: Andersons

By Catherine Paice

LEARN to live with the high value £ and dont budget for higher prices, says farm business consultants Andersons in its Outlook report.

Currency will continue to be the main influence on farm profitability this year. "Farmers should expect no favours from Jack Cunningham in the form of compensation for revaluations, and no relief from a £ sterling that seems likely to remain relatively strong throughout 1998 and beyond."

Forward rates for sterling indicate sustained high value, despite forecasts by major UK banks of a weakening in the second half of the year, potentially to around DM2.60. Such a change would result in green £ devaluations, boosting support prices by 6%, adding £4.70/t to cereals, 1.25p/ litre to milk and £1.85/t to the 1998 sugar beet crop.

But do not budget for this, as bank forecasts are "notoriously inaccurate", warns Andersons.

As things stand, profits for combinable crops will, at best, be maintained at 1997 levels. And the projection to 2001 shows a further slight fall, taking Agenda 2000 into account.

Current milk year profit forecast indicates a profit before rent and finance of 3p/litre compared with 7-8p/litre only 18 months ago. That represents an average drop of £27,000 for a 100-cow herd.

Milk price could fall to a 20p/litre average in 1998/99, halving profits again, unless further cost savings are made. In the longer term, milk prices are set to fall further.

The suckled calf trade has weakened, leaving young bullock calves with premium still to be claimed the only genuinely sale-able commodity in the beef sector. "Nearly all beef producers who wish to stay in business must gear their enterprises to finished beef prices below 100p/kg lw, and may be as low as 85p/kg lw in some systems." Prospects are also relatively poor both for lamb prices, fallen to below 100p/kg lw towards the end of 1997, and pigs.

"The adverse effect of the strong £ on commodity prices is likely to begin to feed through to land prices, but with farmers striving to spread fixed costs, and with around $4bn of investment money chasing £1bn of land value, this is likely to be a gradual process," says the firms David Bolton.

"While farm business tenancy rents are expected to fall, some farmers will still pay high prices to achieve any sort of margin and to supplement otherwise dwindling profits. "An optimistic guide for 1998 might be £120/acre for good quality arable land and £250/acre for root growing."

David Bolton: The adverse effect is likely to begin to feed through to land prices, gradually.