UK economic recovery could hit arable businesses

The UK economy continues to strengthen – on the face of it good news for all concerned. But there could be some negative implications for farmers, who have been insulated from the recent recession.

According to the Office for Budget Responsibility, the country’s economy grew by 1.4% in 2013, up from the 0.6% it had predicted in March last year. “This is being driven by an improving property market, increased consumption and greater bank lending,” says Hannah Ridley, trainee accountant at Old Mill Accountants and Financial Advisers.

“Domestic sales and export orders increased in the fourth quarter of 2013, leading to a rise in business confidence.”

But what does this all mean for farmers? “During the recession consumers spent less on food,” says Miss Ridley. “Taking into account increases in food prices, the average household spend on food fell by 8.5% between 2007 and 2010. Many people switched to cheaper ranges or cut down on expensive items such as meat and fish.” It therefore seems likely that consumers will begin to spend more on food as they feel the benefits of economic recovery.

“Sales of organic food fell by 22% between 2008 and 2012 – but last year showed the first sign of returning confidence, with organic sales rising by 2% in the year to September 2013,” says Miss Ridley. “This indicates consumers are once again willing and able to buy premium products, which could benefit farmers who produce to higher welfare or environmental standards, or who process their products to add value. Hopefully, as demand rises, so too will prices.”

See also: Potato sales drop in 2013

Another driving force behind the current recovery is increased bank lending. While this will undoubtedly help small businesses, it could be argued the benefits to farming may be limited, as access to agricultural lending has remained fairly constant throughout the recession. “In fact, higher interest rates as a result of economic recovery could have a negative effect due to rises in the cost of borrowing.”

For example, a £250,000 loan taken out over 10 years at 2% above base would currently cost about £32,400 to service. A 1% point rise in the base rate, to 1.5%, would increase that cost to about £45,800 – a significant extra burden. “The Bank of England has said it is expecting to start increasing interest rates in spring 2015, reaching 2% by 2017,” says Miss Ridley. “However, this is based on a range of factors, so it’s anyone’s guess whether that will happen as planned or not.”

Falling unemployment could have another effect on the farming community. “As job availability increases outside of the industry, farmworkers may be attracted elsewhere. However, the strengthening pound will make it more attractive for foreign workers to come back and work in the UK, which is good news for business owners.”

The strengthening pound should reduce the cost of imported inputs such as fuel and fertiliser, which will be of considerable benefit to farmers. But it will also make UK exports more expensive on the world market, she adds. “Importantly, as the single farm payment is set in euros, a stronger pound will make the SFP worth less – a definite blow for UK producers.

Every 1p change in the pound-euro exchange rate alters the UK’s single payment by £40m; but it affects total income from markets by a massive £200m. “Farmers should consider protecting against such adverse currency movements by locking into current exchange rates through their bank or broker.”

The growing economy is also likely to lead to higher wages across every sector, says Miss Ridley. “Farmers will, therefore, have to raise their wages to remain competitive – although in 2013 three-quarters of farmers surveyed said they had increased wages by between 1.9% and 2.5%. That compares with a national average of 1%, so farmers are clearly ahead of the game.”

Agriculture’s counter-cyclical natures means it tends to weather economic storms well, so immediate benefits of the recovery appear limited. “However, if recovery continues and consumers begin to spend more, price rises and greater demand for premium products may bring benefits to farmers and open up opportunities for diversification enterprises. Growth throughout 2014 is by no means certain; we must wait and see how economic changes affect future profits.”