Euro slide to keep up pressure on UK incomes?

Robert Harris

FARM incomes could remain under pressure for longer than expected after the dramatic weakening of the Euro against the Pound since its launch in January.

Many analysts expected the new currency to be strong, attracting investors and taking the strength out of the Pound.

Instead, the Euro peaked just two days after its launch, at just over 71p. It has since slumped by 7.5% to a new low of just under 66p this week.

That means the Pound is almost as strong as a year ago, when it was worth almost DM3, despite six interest rate cuts since then.

Unfortunately, the UKs current base rate of 5.25% is still twice that in the Euro-zone, after the European Central Banks recent rate cut of 0.5%.

Maintaining strength

The USAs economic prospects also appear better than those in Europe, so investors continue to favour the Dollar, maintaining Sterlings strength in the process, says Siôn Roberts, chief economist at the NFU.

“It has caught many, including myself, off guard,” he admits. “If cutting interest rates has not made the Pound weaker, it is difficult to see what will in the short term. We need economic growth on the Continent, but that wont happen overnight. We thought we were near to bottoming out in terms of farm incomes. Things look rather less certain now.”

Charles Stewart of Clydesdale Bank agrees. Last May he predicted a couple of tough years ahead, and recent developments do nothing to change his mind. “I am sure it will be a while before we see any upturn.”

The dairy industry will be hardest hit, Mr Roberts believes. The intervention milk price equivalent, worth 20.45ppl on 5 January, is now just under 19ppl, as Milk Marque members found to their cost in the recent selling round.

“But the really big issue is the competitiveness of UK exports and the threat of cheaper imports. Market prices in the dairy sector have collapsed, and the strong Pound is adding to the pressure. We export a lot of cream, and we import a lot of cheese.”

Arable area payments, due to be set on 1 July, will not be affected thanks to the compensation package where, after prolonged NFU lobbying, Brussels agreed to maintain next seasons payments at current levels.

“Arable producers would have been £145 million worse off had we not secured it,” says Mr Roberts. “That is the equivalent of £34/ha.” The slide in the Euro has cut a range of other Brussels payments.

Over 30-month scheme cattle are worth about 4p/kg less this month, and calf processing aid scheme payments have fallen by £3.70 a head to £53.30 for May.

Cereal intervention prices have also been hit. The midweek value for April deliveries was £82.53/t, a fall of £6.63.

But the open market has been concentrating on short-term domestic supply and demand, sheltering it from currency influences, says the Home Grown Cereal Authoritys Gerald Mason.

Wheat surplus

But the UK could have a 200,000t-400,000t wheat surplus this year, he adds. If the Pound stays strong, prices will have to fall for UK exports to compete with French supplies, says Mr Mason.

“The past few months suggest farmers should manage the risk of currency movement rather than trying to anticipate it,” he adds.