Since the Brexit decision sterling has been volatile. This is no surprise, since the value of a currency reflects the confidence traders and investors have in it and the economy behind it. The pound has plunged against the US dollar, but against the euro the drop has been less dramatic as the Brexit vote has undermined already slim confidence in the euro. With uncertainty about the UK economy set to continue, however, sterling will remain volatile around a lower value than before the referendum. That’s good news for farming and indeed for those with a diversification venture trying to attract tourists from outside the UK.
Currency values and the prosperity of farming have always been linked. This was the case long before the CAP and will remain so when the UK is outside the EU. Weak currencies make exports easier and protect the home market from imports. Evidence is the economic pressure Ireland, as a eurozone member and major food supplier to the UK, is feeling and why it’s so concerned about Brexit. The same is true for French dairy products, Dutch and Danish bacon and all the others that take advantage of the UK’s reliance on imports. These countries have two choices – accept a lower return in euros, or secure a price rise from supermarkets, which is an unlikely prospect.
Whatever the currency arguments, agriculture is better off financially now than when sterling soared before the referendum. Its weakening should have a direct impact on milk prices, and that’s certainly needed. The more export dependent a sector is the bigger the impact of the currency change. The market becoming less attractive for those exporting to the UK is a less direct relationship, so will take more time to be felt.
The other impact will be when we get into September and the rate is set for converting euro Single Farm Payments to sterling. This fell dramatically over the past two years, but that should be recouped this year, which will be a welcome cash-flow boost at the end of another difficult year.
Uncertainty and volatility are the new norms, and they will be around for years rather than months. In theory sterling should remain weaker than in recent years, to the benefit of agriculture, but that could change if one of the spin-offs of Brexit is to further undermine confidence in the euro. Currency relationships could swing dramatically, although not before the end of September and the setting of the Single Farm Payment conversion rate.
With the benefit of hindsight we know now that it was the collapse of the New Zealand dollar in the 1980s, as a result of wider economic problems, that made the enforced removal of farm subsidies there a successful gamble.
This is not a situation the UK can use to justify a tough line on replacing the CAP with Treasury support. The New Zealand situation was unique, in that there are few if any countries in the world that are as export dependent. That’s not the situation in the UK and failure to match CAP support would be disastrous.
That’s why, before the referendum, the farm commissioner, Phil Hogan, tried to convince farmers CAP payments were guaranteed through the Treaty of Rome that set up the original EEC, while the alternative was a gamble on the generosity of the UK Treasury.
Already we’re seeing calls for Brexit to be an opportunity to end subsidies for farmers. If that thinking becomes mainstream it will be a huge threat to agriculture. Unlike New Zealand, no matter how great the fall in the value of sterling becomes it could never be enough to make subsidy-free agriculture viable in the UK