Currency continues to influence farming profitability

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Richard Morley of Savills Food & Farming in Lincolnshire.

An increase in the Basic Payment Scheme awards in 2016 was a welcome uplift for many struggling farming businesses, says Richard Morley of Savills Food & Farming in Lincolnshire.

Despite a slight rise this week, sterling plunged to a 30 year low against the dollar at the end of October last year, and continues to be significantly weaker than it was against the euro. But farming tends to do well when the pound is weak for a number of reasons.

The Common Agricultural Policy is set in euros, and how much money UK farmers receive is determined by the average exchange rate between the euro and the pound in September.

 

A lowland farmer in England will receive £33.84 per ha more than last year’s BPS, an increase of 18.9 per cent. Of this, 16.5 percent is solely attributed to the fall in value of the pound sterling against the value of the euro throughout September. The other 2.4% uplift relates to the increase in euro entitlement value for 2016 from 2015.

“The increase this year will be a welcome uplift for many lowland farming businesses, which is mirrored to some extent for both moorland and upland SDAs (severely disadvantaged areas),” said Richard. “The additional award is in places a replacement for lost income from environmental schemes which have not been renewed and just reward in light of the extra regulatory burden of administration. In any respect, it highlights the effect of currency on this subsidy payment, as uncertainty over its future post 2020 continues to rumble on.”

The weak currency has also proved welcome support to commodity prices since Brexit, enabling export markets to grow in new destinations for British commodities to be exploited across the globe.

Beef, lamb, cereals and pulses are above values of this time last year and there is hope for continued improvement in the milk price.

 

“The fundamentals of supply and demand have not changed and the current over-supply throughout the grain producing nations has not reduced,” said Richard. “Should currency markets not be in the favour of UK farmers, the supply and demand balance would reduce domestic prices sharply. It is estimated that the weak sterling level is supporting the trade by £20 per tonne, a level which is dangerously exposed to any movements in currency relationships with either the dollar or the euro.”

 

“Despite Brexit, we believe the future in our sector remains positive, providing that we understand the businesses we manage and are prepared to adapt in order to meet the challenges that lie ahead. There will always be new opportunities in the rural sector and Brexit may well bring some. However, it is more important than ever to be ready to react over the coming few years.”