All eyes on currency values
Farmers will have to tough it out for another year at least,
according to a report released at this weeks AgriVision
event at Stoneleigh. Robert Harris and James Garner report
MARGINALLY better – but only for those with the skill and determination to succeed is how Francis Mordaunt, partner at farm business consultant Andersons, sums up farmings prospects for next year, in the Outlook 2002 report launched at AgriVision this week.
Total income from farming should exceed £2bn, but that is only a slight improvement on this years £1.8bn and nowhere near the long-term trend.
"The fundamental problem is likely to remain the strong £. None of the government reviews into foot-and-mouth and the future of farming can achieve half as much as an easing of the currency pressure."
But exchange rates are unlikely to improve much next year, he predicts. "We continue to budget at k1=62p. The UK economy looks stronger than the Eurozone and there is little prospect of the k stren-gthening on economic grounds."
The damage wrought by this adverse exchange rate on UK support (see table) and farm prices is all too obvious. "Even if the k had maintained its introductory rate of 72p, well below the historic level, that would have lifted total income from farming from £1.96bn to £3.4bn," says Mr Mordaunt.
One big unknown is how currency markets will react to the physical introduction of the k on Jan 1. "Some see the possibility of a peoples revolt against the dropping of national currencies – this would be disastrous because the £ would strengthen even further," says Mr Mordaunt. "But the opposite effect is also possible."
Interest rates are likely to rise next year, says Mr Mordaunt. He is pencilling in a 4.75% level by October. However, he also expects the European Central Bank and the US to raise levels, by 1% and 2% respectively, next year, which will close the gap on the UK, possibly eroding sterlings strength later in the year.
Dairy farmers will struggle to maintain the improvement seen recently. Although Andersons forecasts a spring 2002 rolling price of 19.3p/litre, 2.6p above the Septem-ber 2000 trough, prices may then slip a little as pressure on products, notably commodities, continues.
Beef producers will benefit from larger subsidy cheques, but cattle prices are much more uncertain, staying around 165p/kg for steers in Great Britain, despite a 13% reduction in prime cattle numbers.
"Any reduction in the volume of home-produced cattle can be filled by imports from elsewhere," says Mr Mordaunt.
The outlook for sheep remains precarious. Supplies could fall by a quarter compared with pre-F&M levels, but an effective export trade will be crucial. "But, if things swing the right way, and F&M disappears, then producers could have a better year than we dare hope," says Mr Mordaunt. A higher k21/head fixed-rate premium is also on the cards.
Arable price prospects are better next spring than last, with feed wheat worth £75-80/t. But the longer-term outlook is more volatile. "At present the world market is supporting UK wheat prices, but if this were to significantly weaken, then the intervention floor is likely to be as low as £55/t ex-farm."
• Interest rates – positive (low but increasing)
• Currency: £ versus k – negative (£ remains strong)
• Policy – neutral/positive (final Agenda 2000 increases)
• Cost inflation – neutral/positive (mostly stable)
• World commodity prices – negative/neutral (danger of world recession)
The currency effect
Sterling value (per k)
k (current) (historic) (future)
value 62p 84p 72p
Direct payments (2002)*
Arable area aid (per ha) 360 £223 £302 £259
Beef special premium (per head) 145 £90 £122 £104
Sheep annual premium (per head) 20 £12 £17 £14
Price support (2002)
Cereals (November) (per tonne) 102 £63 £86 £73
Milk target price (per litre) 32 19.8p 26.8p 23p
* Before scalebacks but after modulation. Source: Andersons