Rough ride for sterling means unstable income

5 February 1999

Price comparisons

FARMERS will find it easier to compare input prices once they are priced in ks, but like must be compared with like.

Headline figures, such as those highlighted by the European Council of Young Farmers last December, show big price differences across the euro-zone.

A John Deere combine cost 43% more in the UK than in Spain, and a Kverneland potato harvester was 20% more expensive than in Germany. Plant protection products were often two to three times more expensive in the UK than in Europe. But comparing list prices could be misleading. "I cant think of one farmer in the past 20 years who has bought a machine at list price. Trade-ins and finance cloud the picture," said John Griffith, chief executive of Chesham-based Agricultural Central Trading.

Varying market structures and advice packages, as well as volume and end-of-season discounts, affected agchem prices, he added.

"Nevertheless, there will be more opportunity to shop around, though few farmers need additional training in this area."

Beware risk in q loans

THINK hard before taking out a k loan even though the base rate in the euro-zone is 3% below the UKs.

"On the face of it, that is a big advantage," Norman Coward, visiting professor at Wye College, told the conference. "But if interest rates converge over the next few years, that advantage will become very small."

Farmers would need a k income stream to avoid exchange rate risk on the repayments, he said. With no direct payments available in k yet, farmers would have to rely on buyers, probably exporters, for that. "If the income stream is too low, or irregular, there is a problem."

Exchange rate risk could also occur on the sale of produce. "Generally buyers will fix a price in k ahead, rather than at the exchange rate on the day, so farmers will have to take a view."

Negotiating power weakened by UKs refusal to join euro

The UK may not have joined

economic and monetary

union yet, but a recent

NFU conference showed

how events in Europe will

affect agribusiness here.

Robert Harris reports

BRITAINS position as an international negotiator has been seriously weakened by the governments decision not to adopt the k from the outset.

The UK, which was highly dependent on exports, would take a back seat at the forthcoming World Trade Organisation talks, former agriculture minister John Gummer told delegates at the NFUs recent EMU conference in London.

This relegation threatened the outcome of those talks, and risked a trade war between the EU and the US, he maintained. "During the last negotiations Britain was a powerful player, able to use its influence to get the second largest trading group in the world (its other EU partners) to be more outward-looking."

American officials should rightly be worried about negotiating with an EU dominated by countries with a different view of free trade and able to punch above their weight, said Mr Gummer.

The inward-looking stance of those EU states on a range of issues, including genetic modification and food safety, would be an increasing irritation. "I think this will cause very serious international problems, bringing the likelihood of a trade war very much closer."

UK farmers themselves could also face troubled times, he warned. "There is now a different relationship between the UK and the rest of its EU partners. If the arrangements (for the four EU states remaining outside EMU) advantage British farmers, they wont continue for all that long. And if the UK is disadvantaged, I cant see anyone doing a great deal about it."

John Gummer… The UK will take a back seat at the WTO talks after the governments decision not to join EMU at the outset.

Rough ride for sterling means unstable income

STERLING could face a bumpy ride on foreign exchange markets over the next couple of years, leading to unstable farm incomes.

The UK is now caught between two huge trading blocks, the USA on one side, and the euro-zone on the other, said the NFUs Martin Haworth.

With exports accounting for just 19% and 25% of GDP, respectively, neither power was particularly concerned about external exchange rates, he explained. That meant the $ and the k could swing quite violently against the £.

That would impact directly on farm incomes, he said. "The stronger the £, the weaker UK farm incomes become." An NFU study last year showed this volatility made long-term planning and investment difficult, undermining the UK agricultural industrys competitiveness.

Continued exchange rate risk could also affect that competitiveness. For now, most farmers would have to pay for potentially cheaper products in the euro-zone in sterling. "We could be left behind, unless the k creeps in and farmers can make purchases that way."

Buyers who deal in k could provide a solution. Indeed, some were likely to insist on paying farmers in the new currency to pass on the exchange rate risk. But this could handicap farmers wanting to convert those payments into sterling, said Mr Haworth.

The UKs higher interest rates were also a burden, though this was likely to lessen, he added. The current 3% differential was costing UK farmers £300m a year, almost a third of net farm income.

Long-term interest rates suggested the gap would narrow, with UK rates ending up about 1% above the euro-zone, by 2003, then converging as the UK joined EMU. &#42

See more