Currency Movements

My father in-law was asking me about harvest progress at the weekend and whether prices were as good as last year. I described the fall of prices in cereals, oilseeds, root crops, milk and beef.  Fundamentally, there are ample stocks of most soft commodities around the world at the moment which are pushing prices downward globally, but a shift in such unison often points to one factor; currency.

EXCHANGE RATE –  EUROS PER POUND – Source: European Central Bank

As a simple rule, whether you think of the exchange rate in the cost of pounds in euro terms or euros in pence, the nearer it moves to parity (£1 = €1) the better for UK farming, it keeps our exports competitive and imports less competitive, and subsidy higher in pound terms. However, as you can see, over the last year, the pound has risen in strength by over 10 per cent, disadvantaging UK farming. Sterling is now at a high since August 2012, and hasn’t been this high sustainably since 2008, i.e. the start of the financial troubles. This has taken the same percentage off all agricultural commodities. More positive news continues to come through for the growth of the UK economy, which, whilst still clearly fragile is growing more strongly than most EU member state regions. Discussion about possible hikes in base rates towards the end of 2014 are also fuelling sterling’s performance.

As we head towards the key month of September when the exchange rate is set for the last Single Payment, the gradual rise of the pound is looking to have a greater impact on the profitability of farming with lower subsidies than we’ve had for some time.