Recovery appears long way off for agriculture

12 November 1999

Recovery appears long way off for agriculture

By Robert Harris

AGRICULTURE is fast becoming isolated from the rest of the economy, and the position is set to worsen.

Ominously, the manufacturing and export sectors, which, like farming, have also suffered badly from the strong £, are now showing strong signs of recovery, says Siôn Roberts, chief economist at the NFU.

Latest forecasts back that up. In Tuesdays pre-Budget report, Chancellor Gordon Brown predicted the economy would grow by 2.5-3% in 2000, and by 2.25-2.75% in the following two years. The Bank of Englands monetary policy committee includes a similar figure in its quarterly inflation report, released on Wednesday.

"The rest of the economy is in recovery. Manufacturing in particular is doing much better, a stark contrast to agriculture. Latest MAFF census results provide solid evidence of this – 18,000 jobs, one in 12 of paid workers, left the industry last year," says Mr Roberts.

He suspects that contrast is due to agriculture being very commodity based, so domestic markets are strongly influenced by the strength of the £. Also agriculture has been protected by agrimoney exchange rates, which have historically cushioned the effect of the strong £.

"In 1999 farming received £300m in agrimoney compensation, estimated at a third of farming income. We are still getting huge protection. But the current agrimoney compensation is set to be phased out by 2002."

Hopes that a weaker £ will come to the rescue are fading fast. Although last weeks 0.5% rise in the eurozone interest rate more than offset the 0.25% rise in the UK, rates here are still 2.5% higher.

Banks expect interest rates to climb to 6-6.5% in the next 12 months, says John Page, managing director of Barclays Agriculture. "The economy shows every sign of continuing to grow."

Even at the current differential, the £ could remain attractive to currency speculators, supporting a high exchange rate.

The National Institute of Economic and Social Research seems to think so. In its latest report, it suggests that financial markets indicate that the UK is likely to adopt the k by 2004, at an entry rate of £1:k1.43, just 8% below the current value. "That is the equivalent of DM2.8 -10% higher than was hoped," says Mr Roberts.

However, the £ may continue to track the $ rather than the k, says Mr Page. "The US is heading for an enormous deficit of about $300bn next year. Overseas investors may see the k as a better bet. In a year it may be worth 68-69p, which would compensate for the decline in agrimoney compensation." &#42

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