Weak pound boosts trade and curbs imports

The weakness of sterling is lending crucial support to the UK farming economy, helping to boost export earnings while protecting the industry from lower-priced imports. Watch our VIDEO by economics and world editor Philip Clarke on its effects on farming incomes.

Last week the pound hit an all-time low against the euro, after the Bank of England‘s third base rate cut in a row. At one point sterling was valued at just €1.14, making the pound worth 87.3p a euro.

And while it has rallied a little since then, currency experts are warning that the bounce could be short-lived. Further cuts in interest rates are expected in the New Year, and the currency markets may see this as another sign of fragility in the UK economy, driving sterling lower still.

The impact has been largely positive on British agriculture, however, contributing to higher prices in some sectors and preventing a slide in others.

In the dairy sector, for example, the drop in sterling has had a “dramatic effect” on the value of intervention, with butter rising from about £1750/t a month ago to £1900/t this week.

And while intervention purchasing does not open until March, the recent slide in currency has already enabled UK sellers to put up their prices for bulk butter and cream to Continental buyers, says industry consultant Mike Bessey. He also points out that, without sterling’s devaluation, some dairy products, such as mild Cheddar, would now be dropping in value.

The same applies in the grain trade, where UK arable farmers have been largely spared the slump in values that have occurred elsewhere. Last week, for example, Chicago futures dropped about 14%, due to continuing concerns about the market surplus, while the LIFFE in London was only about 5% lower.

“The pound’s weakness has protected the UK grain farmer from complete disaster,” said Gleadell Agriculture managing director David Sheppard. “Sterling has dropped about 20% this year. If that had not happened, then feed wheat would be worth about £60-£70/t, compared with the £80-£90/t it’s fetching at the moment.”

The meat sector has also benefited from currency weakness. AHDB Meat Services says that the value of beef exports over the first nine months of the year was up 55% to almost £150m. “Higher beef prices, increased European demand and increased exports of higher value boneless cuts have all had some influence,” it says. “But around 20% of the increase in value was due to the currency exchange rate.”

A spokesman for beef processor ABP agreed that the weakening of sterling had made exporting easier. “But, irrespective of currency movements, market conditions in the UK are still difficult, as the industry is facing falling demand for higher value cuts due to the credit crunch,” he added.