Download The impact of a strengthening Pound on UK

NFU Briefing
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Date: 24 September 2014
Ref: Exchange rates and UK Agriculture
Contact: Anand Dossa
Tel: 02476 858548
The impact of a strengthening Pound on UK Agriculture
Introduction
There has been a strengthening of the British Pound against both the Euro and the United States Dollar
during the past year, a trend that could well continue. In light of these developments, it is important to
examine the impact of exchange rate movements for UK agriculture.
Currency is important to the farming sector because:



A stronger domestic currency makes exports less competitive and imports cheaper.
The relationship between the Pound and Euro is vital for both farm income and profitability.
A Strengthening Pound against the Euro impacts on the Single Payment Scheme (SPS).
The sections below will explain these three issues in greater detail within the context of the
strengthening Pound.
Why has the Pound strengthened of late?
Sterling Exchange Rates with Euro and US Dollar
£/€
1.28
1.26
1.24
1.22
1.20
1.18
1.16
1.14
1.12
1.10
EUR
£/$
1.75
USD
1.70
1.65
1.60
1.55
1.50
1.45
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
Mar-13
Jan-13
Nov-12
May-13
Source: HGCA/ECB
Sep-12
Jul-12
May-12
Mar-12
1.40
Jan-12
The Pound has been one of the
best performing currencies of
2014, buoyed by the improving
economic picture here in the UK.
The economy has finally turned
the corner, and it has been
growing faster than previously
projected. The UK has grown
more rapidly than the Eurozone
and the United States, and this
fact has made it more attractive
for investors to buy the Pound. In
addition, the Pound had plenty of
ground to make up after falling by
around 30%, between mid-2007
and early 2008.
Over the past year, the Pound has risen 10 per cent against a basket of currencies; gaining more than
10 per cent against the Euro, and 11 per cent against the Dollar.
So, why does it matter to UK Agriculture?
Generally a stronger Pound has a negative impact on farming exports, as they become less attractive,
but a positive impact on production costs. The prices of imported inputs or inputs traded internationally,
(most notably energy, fertilisers and feed), reduces as the national currency appreciates. A stronger
Pound also leads to a reduction in Pound-converted support payments. In the past the agricultural
sectors have benefited from a weaker currency.
The voice of British farming
Although every effort has been made to ensure accuracy, neither the NFU
nor the author can accept liability for errors and or omissions. © NFU
NFU ECONOMICS
NFU Briefing
Page 2
Pound/Euro Exchange Rate and UK agricultural profitability
There is a strong relationship the
exchange rates and profitability at TIFF £mil Relationship between exchange rates and profitability
€1 =
0.95
the aggregate level. The chart on 6,000
£5.46bn
TIFF £ millions
£
5,500
0.90
the right highlights how exchange
rate fluctuations appear as a 5,000
0.85
major explanatory factor behind 4,500
0.80
farm income movements in recent 4,000
0.75
years. As the strength of the 3,500
0.70
Pound falls, incomes rise. Of 3,000
0.65
course, the indication is that a 2,500
0.60
stronger Pound will put a 2,000
0.55
downward pressure on UK farm 1,500
income. More widely, the impact 1,000
0.50
of a stronger Pound is being felt
across all sectors of the economy,
including those of the automotive Source: Defra Agriculture Accounts & ECB
and construction industries. According to the findings from the Ernst and Young Accountcy Group,
currency movements drove more than 20 per cent of UK profit warnings in the first half of 2014,
compared with just three per cent last year.
The likely impact on EU Single Farm Payments
This relationship is due, in part, to the fact that the Pound/Euro Exchange Rate has a substantial
bearing on the value of direct payments received by farmers and growers in the UK. Although other
factors (most notably the recent CAP reforms) affect the payment of individual farmers, exchange rate
movements remain a fundamental factor behind fluctuations in the overall level of agricultural support.
Regardless of how much the
exchange
rate
fluctuates
throughout
the
year,
the
exchange rate used to calculate
SFP is currently taken from the
last working day in September
every year. This means that the
level of SFP will depend on the
exchange rate at that time, and
thus currency changes represent
a risk to the level of SFP farmers
receive.
SPS Exchange Rates
For example, if the predictions by
various forecasters turn out to be
correct, the exchange rate of
€1=£0.80 would be the lowest since 2008 and virtually the same as the conversion used for setting the
SPS rate in 2012. However, over the last few days the Pound has continued to strengthen and the
current rate is below £0.79. A stronger Pound will reduce SPS payments in 2014 if current trends
continue.
UK Agriculture Trade and Exchange Rate
UK agricultural exports are dominated by trade with the EU. The European market accounts for 75 per
cent of the UK's exports. Food and drink is now the UK’s fourth largest exporting sector, with exports
more than doubling over the last decade.
The voice of British farming
Although every effort has been made to ensure accuracy, neither the NFU
nor the author can accept liability for errors and or omissions. © NFU
NFU ECONOMICS
NFU Briefing
Page 3
Exports in 2013 recovered strongly after a flat 2012. The total value of exports increased by five per
cent to £12.8 billion. Exports to the EU, our key market, returned to growth, increasing by three per cent
on the previous year.
£ mil
14000
Food and drinks exports on the rise
£12.8
12000
10000
8000
6000
4000
2000
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
2001
A stronger Pound means that
products of UK origin will become
more expensive in export markets,
with the potential that exporters may
lower prices to compete, which in
turn could impact on overall trade
values. The strengthening of the
Pound comes at a time when nearly
all farmgate prices have experienced
falls over the past few months. A
combination of global supply and
demand factors; and continued
intense competition at a retail end;
has put a downward pressure on
prices in the beef, dairy, pig and
cereal sectors.
Source: Food and Drink Federation (FDF)
What could the future hold?
While forecasting exchange rate movements can be a risky business, many forecasters believe that the
Pound is likely to strengthen further in the coming months, at least against the Euro. This is because
the latest data released by the Office for National Statistics (ONS) indicated that the UK economy grew
by a further 0.8%, adding further optimism for the Pound against its major counterparts.
The International Monetary Fund (IMF) has also revised its forecast, upgrading Britain’s economic
growth prediction to 3.2 per cent for 2014. Britain is now expected to grow faster than any of the other
G7 nations, including America, Germany and France.
In contrast, the economic picture is very different in the Eurozone. All the major Eurozone economies
appear to have ground to a halt. GDP was flat in the second quarter, compared with growth of 0.2 per
cent in the previous three months, according to official figures. Poor performances from Germany,
France and Italy, the core of the Single-Currency Region, were responsible for the stagnation. This
indicates an underlying weakness for the Euro. As a consequence financial markets could lose
confidence in the Euro, and this will likely to further weaken its position relative to the main other
currencies (Pound and Dollar).
However, the Pound’s fate is far from certain; there is political uncertainty with a General Election next
year and a potential exit from the European Union thereafter. These factors may impact on the Pound’s
ability to strengthen against the major currencies in the fairly near future.
The overall message is that exchange rate fluctuations will continue to prove to be crucial for British
farmers; affecting not only their international competitiveness, but also their levels of agricultural
support and profitability. Currency might not be the most obvious and straightforward variable to factor
into plans around farm finances, but a strengthening Pound should be factored into future scenario
planning and budgets.
The voice of British farming
Although every effort has been made to ensure accuracy, neither the NFU
nor the author can accept liability for errors and or omissions. © NFU
NFU ECONOMICS