Euro exchange: Opportunity or risk for UK agriculture

Is a weakened sterling good for farmers? John Barker, corporate agrifood manager at HSBC, explains the implications

Anyone lucky enough to take a holiday in the eurozone in the past few months will have realised just how expensive things have become when converted back to sterling with the marked change in the exchange rate.

But does this represent an opportunity or risk for UK agriculture and for the food chain? The answer to that is… it depends. Food production and consumption is now more than ever a global machine, with British consumers enjoying the benefits of all-year-round supply of even the most niche produce. As a result, for some UK businesses the recent exchange rate movements present opportunities while others see the changes as a significant challenge.

For the UK’s farmers the reduction in the value of sterling from a relatively stable 79p to the euro to about 90p is a significant benefit. The Single Farm Payment (SFP) is calculated in euros before being converted into the sterling amounts paid to farmers. Providing that the exchange rate holds steady between now and September, when the conversion rate is set, a SFP income for last year of £100,000 will now become £114,000 on a like-for-like basis.

harvest big 
A weaker pound has cushioned UK growers from falls in the wheat price, but there is a downside to currency fluctuations.
Currency markets continue to demonstrate volatility, prompting some farmers to talk to their bank about how they can use currency forward contracts and other treasury tools to lock into the current exchange rate. There is, unfortunately, a minimum deal size for this type of transaction of €40,000. In round numbers this means that if your SFP last year was over £32,000, then you can use this method to lock into current rates. There could, of course, be a downside to doing a trade at this time. If rates move further in your favour after you have entered into the trade, you may lose out on all of that benefit, depending on what treasury product you choose. We would, therefore, strongly advise farmers to take professional advice to understand the implications for their business before committing to a deal.

The statistics on foreign trade show that while we are increasingly importers of both agricultural commodities and food products, we are also significant exporters in some sectors and at certain times of the year. The weakening of sterling has substantially helped exporting businesses by making their products more competitive. Meanwhile, firms supplying domestically-grown produce to the home market are also benefiting as imports become more expensive in sterling terms.

Last year’s peak in wheat prices was driven by a shortage of global supply, but was also exaggerated by speculative trading. Since then dynamics have changed and prices have fallen. But the pound’s depreciation against the dollar has helped to cushion the blow, with British producers receiving about £15/t more than would otherwise have been the case. Such a differential will make a marked difference to the profitability of arable farmers this year.

Unfortunately, there is a flip side. Weak sterling means that importing goods becomes more expensive. World prices for energy are predominantly set in US dollars. The tumbling price of crude oil from a peak of $142 a barrel down to nearer $55 today should signal lower diesel and agrochemical prices. The close association of oil and gas prices should also ripple through to lower fertiliser prices. While we have started to enjoy falls in costs in these areas the full effect has been blunted because a lower exchange rate for the pound tends to push up the price paid by British farmers.

The integrated nature of the UK’s food supply chain means that most domestic suppliers of many fresh produce lines into supermarkets are contracted to provide those products all year round. As a consequence, most have now developed extensive overseas supply and growing operations to provide produce out of the British season. Those companies have been feeling some pain during this winter as importing those goods has become more expensive. So, as the home-grown crop comes on line this spring and summer, many will be looking to recoup some of those losses by optimising margins.

So is a weak sterling good for UK agriculture? And what is the future outlook? I believe that on balance it is good for British producers. While volatile market prices driven by supply and demand as well as currency fluctuations can neither be controlled nor influenced by farmers, our incomes, competitiveness and profitability will all be improved with a lower pound. The latest HSBC forecasts expect the exchange rate with the euro to hold steady at about 93p, with a steady strengthening against the dollar moving towards $1.60 by the end of the year. On this basis, there is a reasonable chance that UK agriculture will hold on to the currency gains that it has made, at least for the next year or so.

• To hear more about this subject come and listen to Mark Berrisford-Smith, HSBC’s Senior Economist, at the Forum being held on the HSBC stand at Cereals on Wednesday 10 June at 11am.

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