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Assessing the impact currency has on exports

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In a year of plentiful grain supplies, exporting countries have to be competitive if they are to win business and currency plays a key part in that battle. Unfortunately for the UK, a weak euro is hampering sales, although a strong dollar has resulted in some opportunities. Cedric Porter reports.

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After small harvests in 2012 and 2013, the large 2014 crop means the UK has to re-establish itself in the export market in a year when competitors such as France and Germany also have large stocks. To add to the challenge, a strengthening pound against the euro has made British cereals less competitive.

 

Defra figures show the UK produced 16.606 million tonnes of wheat and 6.911m tonnes of barley. Between the beginning of July and the end of December 938,000t were exported. That is up 315% on the 226,000t shipped during the same period in 2013, but that total was the smallest export volume in recent times. This year’s wheat exports have been at the slowest rate since 1991/92.

 

Wheat production, exports and prices

Wheat production, exports and prices

In the last similarly bountiful year (2008) when 17.227m tonnes of wheat were produced, 2.004m tonnes had been exported by the end of December, with 3.524m tonnes shipped by the end of June 2009. Barley production in 2014 was at 6.911m tonnes, similar to the 7.092m tonnes harvested in 2013. By the end of December 743,000t had been exported; again similar to the 777,000t shipped in the last six months of 2013. Last season 1.158m tonnes were exported.

 

Both wheat and barley are being sold into a plentiful world market, with stocks high and production outstripping demand last year. There has also been an active currency exchange market over the last year, largely to the detriment of

British cereal growers. A year ago €1 would have cost 82 pence, but now it is just 73p, a difference of 11%, making British products more expensive in the eurozone. But the pound/dollar exchange rate has been kinder to British exporters.

 

A year ago a dollar cost 60p, now it is 64.5p meaning the pound is 7.5 per cent more competitive against the dollar than it was. Over the last year the gap has been even wider, with a dollar worth 58p in July and 67p in January.

Export figures

There is an apparent link in the export figures between the strength of the pound against the euro and its weakness against the dollar. In the six months to the end of December 33% (309,000t) of wheat exports were to non-EU markets. That is the highest proportion of wheat sold outside of the EU in the last 10 years by some distance. Sales of 206,000t to Algeria made up most non-EU exports. Barley exports outside the EU have also been strong at 37% of the 743,000t total, although that is down on last year’s figure at the same point in the season.

 

Helen Plant, senior market analyst at the HGCA, says: “The weakening of the euro has come at an unfortunate time for the UK.

 

“Not only has the UK got its largest crop for six years, but there is also a large volume of competitive feed grain, especially wheat, on the market from other EU countries. About 60% of the UK’s wheat is Group 4 feed types and our export market for the crop is largely in the EU. We will have to be competitive and win late season exports if we are to avoid a significant carry-over of stocks into the new season.”

 

But she is encouraged by the amount of wheat which has been shipped outside the EU and also the pace of barley shipments, with the high quality of the 2014 crop reducing the import need too. Oilseed rape exports are also ahead of last year. Elsewhere, maize imports are at high levels because of large global stocks, increasing UK feed availability.

 

Destination of exports and exchange rates

Destination of exports and exchange rates

 

The HGCA’s British Cereal Exports division has been working with buyers inside and outside the EU to highlight the UK’s range of cereals and it has reported strong interest in UKS Group 3 soft wheat in particular. The focus on building markets outside the EU makes sense in the short-term if the pound remains strong against the euro and weaker against the dollar.

 

In the longer term it makes even more sense, as it is those markets where populations are growing at a time when many populations in EU countries are shrinking. Work to access the Chinese barley market is also taking place. If that happens then the UK could sell to one of the world’s most dynamic markets.

 

David Shephard, managing director at grain company Gleadell, says that will remain on the UK as it seeks to export wheat in particular.

 

“EU prices remain underpinned due to a record export pace, with shippers executing large programmes in France and Germany, and the weaker euro,” he says.

 

“UK futures and delivered premiums for feed and quality wheat continue to weaken as further increases in sterling nullify hopes of further export trade.”

Euro stability

The pound has strengthened significantly against the euro, explains Mark Berrisford Smith, head of economics at HSBC Commercial Banking, but barring political or economic crisis, he believes most of the movement has already taken place.

 

“The euros loss of value against the pound and the dollar was largely because of the European Central Bank’s [ECB] decisions to cut interest rates and adopt a programme of quantitative easing [QE]. They have both been factored in now and there are no other significant issues which the market is currently reacting to.”

 

HSBC is predicting an exchange rate in the range of €1: £0.72-£0.74 through to the end of next year, similar to where the rate is at the moment.

 

“The UK has a much faster growing economy than the rest of Europe, while the ECB is unlikely to increase interest rates during the period it is committed to QE, which is scheduled to last until September 2016. Both of those factors will keep the euro weak and the pound stronger.”

 

Interest rates

Interest rates play a key role in exchange rates. The higher the interest rate in a country, the more attractive its currency becomes to investors in the international money markets.

 

Current ECB interest rates are near or even below 0%, making the euro an unattractive currency to invest in. The UK base rate is 0.5%, but there is an expectation it will increase in early next year.

 

“There is an expectation the US will raise rates first followed by the UK,” says Mr Berrisford Smith.

 

“Our prediction is the UK base rate may move up a quarter every quarter starting from early next year, ending at 1.5% by the end of 2016. We may have got used to six years of rates at of 0.5%, but even 1.5% is still historically very low. An increase in UK interest rates will give further support to the pound against the euro.”

 

There are political and economic issues which could have a significant impact on exchange rates. One of those is the UK General Election. Currently the currency markets are viewing the event neutrally, but if there is a period of uncertainty forming a government then that could weaken the pound. Similarly, if a government which is committed to holding a referendum on the UK’s membership of the European Union is elected that could affect the value of the pound until that vote is held, which could be any time up until the end of 2017.

 

Being aware of the impact exchange rates may have on a farming business is important, says HSBC’s head of agriculture Allan Wilkinson.

 

“For one thing, the Basic Payment Scheme is calculated in euros with the pound rate determined over the average exchange rate during the month of September. There is the option to fix all or some of that payment in advance which will reduce uncertainty. But perhaps more importantly, is the effect the exchange rate has on the price of commodities such as grain. If the relatively strong pound persists then it makes marketing your grain and understanding the market you are producing for even more important. The currency situation is also another reason to ensure you are controlling costs and maximising the value of your assets.”

 

Pluses of a stronger pound

  • Many inputs are imported. You can opt to get your Basic Payment Scheme payment in euros allowing you to fund direct input purchases in euros. Even buying imported inputs in pounds from a supplier should be more competitive if savings are passed on
  • A focusing of the mind on delivering what export markets want. Price is important, but so is quality and availability. Deliver those and you may win export business
  • The emergence of a global market provides more diverse opportunities, so while the pound is stronger against the euro it is more competitive against the dollar
  • The pound is still relatively weak historically. Since its introduction in 1999, the euro has ranged in value from just 58p in October 2000 to 94p nine years later. Over its life its average value has been 74p

Possible currency events

  • May 2015. The UK General Election. The emergence of a minority government, protracted negotiations in forming a government, an unstable coalition or a commitment to a referendum on EU membership could all weaken the pound. A clear majority or workable collation could strengthen the pound
  • June 2015. Greece’s bailout extension only lasts until June. A breakdown in talks could weaken the euro further. A more positive outcome to talks could strengthen the single currency, particularly if Spain, Portugal and Ireland continue to recover
  • September 2016.The end of the eurozone’s QE scheme. An extension could weaken the euro further
  • Anytime. A deepening of the Russian crisis. The ongoing crisis and the fall in oil prices halved the value of the rouble against the dollar in late-2014. Despite some strengthening of the rouble since, this will make growing crops with imported inputs expensive and could reduce output
  • Anytime. World banking crisis. Many countries are still heavily in debt and there have been fears over the Chinese economy. The indebtedness of Italy and France still give some cause for concern
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