Stubborn Pound hits farm prices

By FWi staff

FAILURE of the Pound to follow its predicted decline against other European currencies and the Euro is hammering prospects for improved farmgate prices.

Even after the most recent 0.5% drop in UK interest rates, Sterling has hardly changed against the Deutschmark, Franc and Euro.

“This reflects the relative fundamental strength of the UK in comparison with other North European economies, in a well-controlled economy that is currently meeting most of its targets,” comments Steve Ellwood of Midland Agriculture. “In terms of short- and longer-term deposits, the UK still looks effective.”

But he notes that although currency parities have stabilised in recent weeks, Sterling has followed an overall downward trend in the last year.

Much now depends on the Governments position on entry to the Euro system, when currency markets will probably adjust fairly rapidly. While a decision on Euro-zone entry is awaited, the relatively strong Pound and consequent weak grain price seem bound to continue at least into the new-crop marketing year.

“Whatever the eventual trend in Pound values, we are likely to be faced with much more volatile trading conditions,” says Mr Ellwood, and he notes that the structural surplus in world grain supply still remains the dominant factor in producer returns.

“Farmers must devise a more orderly means of risk management, with a structured selling policy, using contract and futures arrangements based on professional advice.”

Grain exporters in particular are up against French wheat FOB at Rouen for February delivery at the equivalent of £71.57/t.

Independent farmers grain broker Jeremy Cole cautions against panic selling. He insists that his clients provide him with a “bail out” price below which they cannot afford to go, and a “standard of living” (SOL) price which they hope will meet their current expectations.

These yardsticks should be set as far ahead as possible, he says, and long before the crop has been sown.

This allows him to take the opportunity to sell if necessary whenever the SOL price is exceeded. “If the market falls to within £3 of the SOL price, you need to start making decisions,” he says.

Meanwhile, he predicts that the only thing that will stop the market decline is that no-one is selling. “But if the Pound continues strong, and world prices continue to fall, our prices will have to fall, too.”