Incomes slump, costs rise - How come?
- September 15, 2000
This Opinion was featured in the October 2000 issue of the the Anglia Farmer and Contractor
Losses to farm incomes in East Anglia resulting from the strength of the £ should, in theory, have been offset by lower costs. Having to operate in a high cost economy is the greater and longer term challenge for all UK farmers.
The damage inflicted on income was underlined in July with the adjustments to EU Area Aid Payments to cereal growers. The increase of 30 euros/hectare (at that time approximately £17 at the then rate of 56p=one euro) which was part of the Agenda 2000 settlement was intended to compensate for a nine euros/tonne (£8/tonne) cut in intervention support.
The strength of sterling both increased the cut in support and effectively reversed the planned compensation.
As important to the bottom line should have been lower farm input costs. If costs had fallen by as much as revenue most farmers would now be much happier and, in theory, this is what should have happened.
With a supposedly common market any losses in terms of lower output prices should have been largely offset by lower input costs. Theory, it seems, has been very different to practice.
In the first place most costs, particularly for arable and beef farmers, are incurred months and even years before sales are made. Again, in theory, farmers suffer a loss on all assets acquired and costs incurred at lower exchange rates. These losses should, of course, be recaptured if and when the £ weakens.
With a few notable exceptions farm costs have not fallen as the £ has strengthened, and where they have it seems that supply and demand have been the driving forces rather than any change in the currency value.
Britain currently claims the best inflation record in the EU, 0.5 per cent compared with an average of 1.9 percent for the 11 euro member states. But the claim is rather hollow in the context of the five per cent decline in the value of sterling against the euro.
If the common market was as common as it is supposed to be, much of that five per cent should have been reflected in lower British prices, almost certainly resulting in negative inflation. Relative to the competition for farmers, Britain's inflation record has been poor.
So the challenge for British farmers lies as much in having to operate in a high cost economy as it does in the lower output prices resulting from the strength of the £. This simple fact is evident to anybody who has travelled in Europe or further afield.
Why should this be? There are many answers and no simple ones. The management of such matters lies with the Bank of England and the British government. The challenge for the Bank is that its single tool for dealing with inflation, raising interest rates, is rather blunt and in the short term can be counter-productive for farm interests. Raising interests rates results in short term increases in exchange rates with the positive aspect of taming prices coming months if not years later.
The government's role is much more complex. Items that immediately come to mind include the effective and appropriate use, both currently and over the years, of investment and employment incentives, environmental and food safety regulations, the management of the public sector and competition policy.
There are clearly no simple or quick fixes. One area where farmers could make a contribution relates to the use of the euro. If the option of receiving EU support payments in euros was available and farmers used it, not only banks but the wider farm supply industry might be encouraged to quote prices in euros.
It is probably cynical to suggest that windfall benefits from the rising value in the £ have tended to be pocketed, while any weakness is used as an excuse for raising prices. But if it does occur, the option of paying in euros would put a spoke in that particular wheel. None of this is intended to be a case for banishing the £. That decision should be made not upon political grounds by government, but collectively and commercially by industry over a number of years as - and if - the euro is found to be effective.
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