Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Currency War of 2009–11 wikipedia , lookup
Currency war wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Bretton Woods system wikipedia , lookup
International monetary systems wikipedia , lookup
Foreign exchange market wikipedia , lookup
Reserve currency wikipedia , lookup
Purchasing power parity wikipedia , lookup
International status and usage of the euro wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
NFU Briefing Page 1 Circulation: NFUOnline 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