Incomes set to fall after Pound soars to 10-year high

By Robert Harris

STERLING soared to a 10-year high against the German mark on Tuesday (31 March), putting further pressure on agriculture. Farm incomes, already down 45% in the past year, are set for another fall.

Increased imports will hit the beef and sheep sector, grain values are falling and a Green Pound revaluation looks certain on May 3.

The Pound broke through the DM3.10 barrier on Tuesday, easing back slightly on Wednesday to DM3.096. That marks a 20% increase in the exchange rate in the past 15 months (see graph, right).

Currency <I>v</I> feed wheat price”></td>
<p>High interest rates are the main driving force, say experts. UK rates are about 4% higher than Europe, sucking in foreign investment. “The UK looks like a safe haven in a storm,” says Charles Stewart, agricultural manager for Clydesdale Bank. <P></p>
<p>Short term, the gap may widen, says NFU chief economist Sion Roberts. “The Bank of England is not political. It may increase rates to dampen the economy.”<P></p>
<p>The move to a single currency is also fuelling the Pound, he adds. The Euro is expected to start as a relatively weak currency, with the new European Central Bank, dominated by France and Germany, unwilling to raise interest rates.<P></p>
<p>Sterling is likely to remain strong. “There are so many factors involved. By definition it cant be undone quickly,” says Mr Stewart. “It could last a couple more years.” <P></p>
<p>The current situation highlights the dangers of UK agriculture remaining outside EMU, says Mr Roberts. “A fair value for the Pound is DM2.5-2.7. But the Pound will weaken only when the Bank of England is convinced the whole economy is not overheating.”<P></p>
<p>Eventually, the European Central Bank will raise interest rates to cope with economic expansion of new member countries.<P></p>
<p>That could coincide with a weakening of sterling when the UK Government decides on a single currency joining date, since interest rates will converge with Europe.<P></p>
<p>The soaring pound is driving prices down, says Allied Grains Hugh Scryver. Old-crop feed wheat fell by £4 last week to about £66/ t. Harvest movement wheat is now valued at mid-high £60/ t, November sales in the low £70/ t range.<P></p>
<p>The Green Pound gap (the difference between the market value of sterling and the fixed agricultural rate) stood at 7.8% as<I> Farmers Weekly</I> went to press on Tuesday. At that level, a revaluation of nearly 4% would be triggered on May 3, cutting the cereal intervention price by about £3.50 to £84.29/ t. Arable area aid will also be affected – cereal payments would drop £9.93/ha. October-March milk prices could also fall, by 0.5p/litre.<br />
For this and other stories, see Farmers Weekly, 3-9 April, 1998

  • Click here to subscribe to Farmers Weekly

    See more