Following a number of years of sluggish performance, the UK economy finally seems to be heading in the right direction. But consumers continue to feel the pinch on spending, and with the European economy still depressed, selling into both domestic and export markets remains challenging, says Richard King, head of Andersons’ business research.
UK GDP growth improved to an estimated 3% in 2014 – and is forecast at 2.6% in 2015. “While this growth is good news, it may prove problematic to agriculture in the form of a stronger pound and bank base rate increases,” says Mr King.
He doesn’t expect base rates to rise until the autumn, when they are unlikely to breach 1%. “Longer term, it seems borrowing costs will only rise slowly: It may be 2019 or 2020 before they reach 4%.”
Even so, with rates at historic lows, now may be a good time to invest, despite the current squeeze on margins. “As long as you’re investing to improve efficiencies it may be worth fixing some borrowing at these levels,” he says.
Andersons expects total income from farming will drop by another 6-8% in 2015, to £4.4bn – the lowest since 2008 and nearly 14% below 2013.
Exchange rates are one of the most important drivers of UK farmers’ profitability, with a strong pound eroding basic payments and undermining exports.
Mr King anticipates a steady firming of the pound, so that €1 will be worth about 75p by the end of the year, so farmers need to consider how they will manage risk to protect against fluctuating commodity and input prices.
“The International Monetary Fund forecasts that eurozone growth will only be 0.8% in 2014 and 1.3% in 2015,” he says. “And there is a 40% chance that it will slip back into recession.”
Europe is the UK’s largest trading partner, so weakening demand will not be good for the industry.
“There is also an issue with how little of the UK’s economic growth has found its way into consumers’ pockets,” adds Mr King.
“Many households are poorer in real terms than they were before 2008. Supermarket price wars and the rise of the discounters mean the whole supply chain is likely to remain under pressure throughout 2015.”
Producing to market specification will therefore be highly important. “If you are a favoured seller that will give you an edge in the tough times.”
- Interest rates to remain below 1% until at least autumn 2015
- Consumer spending still under pressure
- £:€ exchange rate to rise to €1:75p
- Invest in improving efficiencies if possible
- Risk management will be vital
- Produce to market spec to secure trading relationships