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Exchange Rate Hammers UK Producers

by 5m Editor
13 June 2001, at 12:00am

By Dr John Strak - It's the exchange rate, stupid!: In this month’s Strak report, Dr Strak looks at one aspect of Government policy that has a huge impact on UK pig farmers' fortunes. Overvaluation of the pound continues to be a continuing complaint of not only farmers but of the manufacturing industry as well. This article highlights the impact on Pig Farmers of the UK Government following a high exchange rate policy.

Dr John Strak

Dr Strak's views on the UK and global pig markets are produced in Whole Hog every fortnight. For more details click the link at the foot of the article.

I'm writing this month's Strak report well before election day in the UK and you may even read this before the polls are open. But whatever the election result I wanted to remind you of the one single aspect of Government policy that would make a major and immediate difference to UK pig farmers' fortunes - the exchange rate.

When Bill Clinton was first elected his election campaign was based on a simple slogan - it's the economy, stupid! And I rather feel that UK farmers would do well to borrow his tactic in order to ram home the importance of the exchange rate when their competitiveness is being discussed. A recent edition of The Economist drew attention to the overvaluation of the pound and I thought I would present you with some more evidence of the impact of this Government policy.

The statistical office of the European Union has recently released a statistical note on the behaviour of farm incomes in the EU. And it makes interesting reading. It demonstrates that not everyone in Europe experienced the same change in farm incomes in 2000. The different performances depended on the number of farmers and farm workers leaving agriculture in different member states, and the exchange rate policy being followed by their governments.

The different changes in farm income (real income per full time worker in agriculture) for different member states and for the euro-zone countries (euro-11) and the EU as a whole are shown in Chart 1.

Chart 1: % change in EU farmers' real incomes in 2000

These relative changes are mirrored in the data for pig farms only. Charts 2 and 3 illustrate the changes in physical output and the real value of output in the EU's major pig farming countries in 2000. Whichever way you look at the numbers the UK pig farmer has had a bad time.

Chart 2: % change in volume of EU pig output, 1999-2000


The variation in performance in this list is startling but why, I hear you ask, has this happened when you have all worked your socks off to improve productivity?

If you look at what lies behind the figures it's important to note that real terms agricultural factor income actually fell in 2000 for eight of the fifteen member states and in the EU-15 in total (by -1.2% on average). But because the numbers of farmers and the farm labour force fell by a larger amount (-3.0%) the real income of full-time workers left in the industry increased (by +1.9%) in the EU 15. So, one way of getting farm incomes up is clearly shown by these data - get farmers to leave the industry.

Chart 3: % change in real values of EU pig output, 1999-2000

Incidentally, there is another story behind these changes - the changes in income distribution between livestock and arable farmers. There was a sharp rise in real prices for livestock in 2000 and this was mainly due to the recovery in pig prices from a cyclical low point in 1999. It's no accident that Denmark, the EU's biggest pigmeat exporter, was a country where the rise in real farm incomes was almost the highest. In the big crop-producing countries (France, Italy, Germany, and Spain) the real terms value of crop output fell - with the Italian fall being the largest at -6.0%. This explains the relatively low position of these large countries in the ranking of income changes above. It seems that 2000 was a year of "up hog and down corn" .

There's another key twist to the statistics; the spread of farm income changes across member states in the EU can only partly be explained by the composition of farming in different countries and the willingness of the farm labour force to retire from the sector. In 2000 eleven countries were part of the euro zone and their currencies were tied in to the (relatively weak) euro on a formal basis. These countries (now joined by Greece) have had a common basis for their farm input costs and farm output prices - the euro. Of the countries outside the euro zone, Denmark performed extremely well - but although it is not a member of the euro zone it informally shadows the euro exchange rate. Thus it has had no cost or price disadvantage with its competitors in the EU - and could take full advantage of its technical and marketing efficiencies in pig production.

The UK, however, is not part of the euro and its farmers (and manufacturing and tourist industry) have had to price their products and services with an overvalued exchange rate (The Economist suggested that this overvaluation could be as high as 26%). Whatever efficiencies the UK farmer might have, and no matter how many have left the industry, it has been impossible for farmers, factories or tourist attractions to compete with a +25% surcharge on their products. The UK's position in Chart 2 is, therefore, a direct reflection of the impact that exchange rates have had on farm profitability.

If you want another illustration of the impact of the strong pound imagine that after the UK election result, whatever it is, the victors decide to follow Denmark's idea of shadowing the euro (this is not entry to the euro - just shadowing it). That would mean that the production costs of the UK's competitors' pigmeat went up overnight, in sterling terms, by c. 25%. Table 1 shows the benign effect of this on UK farmers. If this happened the supermarkets and other importers would look at UK-sourced pork and bacon in a different light and, at a stroke, the UK pig industry would be more competitive. Whatever the result is in June I do hope these words of mine have made a point. When you are speaking to politicians, in whichever country you produce pigmeat, remember to remind them, it's the exchange rate, stupid!

Table 1: Competitor's cost of production
(pence/kg dw) with a weaker pound
Cost of production
(pence/kg)
£ shadows Euro
Cost of production
Belgium 83 103.8
France 77 96.3
Denmark 79 98.8
Germany 84.3 105.4
Netherlands 82.5 103.1
UK 95 95

Reproduced courtesy