Continuing Low Rates Of Interest And The Weakness Of Sterling Are Good News For Farmers
The Bank of England kept base rates at 0.5% today (Thursday 10th December), meaning the historically low level has been unchanged for nine months.
Low interest rates clearly benefit those farmers who are borrowing but it is also estimated that weak sterling has increased UK Single Farm Payments by 400 million this year and impacted positively on market prices.
The weak pound has made UK commodities cheaper compared to other countries. This has helped to drive exports and reduce imports, says Gareth Oakley, Agricultural Director at Lloyds TSB Agriculture.
Surplus grain stocks in Europe mean the effect on grain prices is less marked, however, it is possible to gauge the current effect on milk prices. Figures show that in August 2009 UK milk prices were 7% higher than the European average. A year previously prices were virtually the same as the rest of Europe. Currency had a bigger influence on the price premium than market forces. Elsewhere, DEFRA figures show that weak sterling helped increase beef exports by 17% over the last two years, with sheep meat exports up by 21% over the same period.
Long term prospects look good because of growing demand around the world, but market volatility will make returns variable. Support from the Common Agricultural Policy is also set to decline in the longer term.
Trevor Williams, Chief Economist at Lloyds TSB Corporate Markets, believes that the euro will trade at approximately 87p for most of 2010.
Lower wage inflation in the UK than other parts of the world and a greater emphasis on exporting is likely to keep the pound more competitive than it has been in the past.
Mr Oakley highlights that there are financial tools available from Lloyds TSB that allow farmers to benefit over the longer term from the current weak pound and low interest rates.
Fixing the exchange rate for 2010 Single Farm Payments is one way of locking into the current weak pound, while low interest rates continue to provide opportunities to borrow money at a fixed rate for longer periods of time, concludes Mr Oakley.
- Lloyds TSB Agriculture: Lloyds TSB Agriculture provide a personalised banking service to farmers and rural businesses delivered through a network of over 90 managers experienced in agriculture, based in 43 rural offices throughout the UK. In recent years Lloyds TSB Agriculture has seen strong growth in its acquisition of new customers – the rate of customers moving to Lloyds TSB Agriculture from other banks currently stands at around 750 farmers per year.