Interest and Exchange Rate Stability Provide Platform for Growth

Interest and Exchange Rate Stability Provide Platform for Growth
2009-06-08

The Bank of England’s 4 June announcement to keep its base interest rate at 0.5% for the fourth month running means farmers still have the opportunity to borrow at historically attractive levels.

The Lloyds TSB Corporate Markets Economics Research Team says that the UK economy remains weak, which is maintaining the need for low interest rates and also keeping the pound competitive against currencies such as the dollar and the euro.

The team predicts that interest rates could stay at similar levels for the rest of the year and despite a recent modest strengthening of the pound against the euro, it believes that a value of around 90 pence to a euro is likely for most of the year.

“The euro could move within a range of 85 pence to 95 pence, but a fair price is likely to centre on 90 pence,” says Trevor Williams, Chief Economist for Lloyds TSB Corporate Markets. He predicts the US dollar will trade in a range of 59 pence to 77 pence.

A period of stable and low interest rates and a weak pound provide an opportunity for the UK farming industry to strengthen its position and plan for the future, believes Paul Spencer Agriculture Director for Lloyds TSB Agriculture and The Agricultural Mortgage Corporation (AMC).

“The weak pound has made British agricultural products very competitive, while low interest rates make borrowing to strengthen the business for the long-term very cost effective,” says Mr Spencer.

The continuation of low interest rates and a weaker pound will be welcomed by cereal farmers in particular, as they gather for the Cereals Event and prepare for this year’s harvest. Grain production concerns around the world have pushed up the price of UK cereals in recent weeks, but growers still need to maximise their output and use their inputs as effectively as possible if they are to make profits and invest in the future.

“Now is a good time to plan the future shape of your arable business with your Lloyds TSB Agriculture manager or AMC agent,” says Mr Spencer.

“In the short-term there is real imperative to finance the cost of inputs such as fertiliser as effectively as possible, while in the longer-term there is the need to invest in new machinery and buildings such as drying equipment and grain stores.”

With the pound still at an advantageously low point against the euro, now is also a good time to consider hedging future Single Farm Payments, adds Mr Spencer.

“Hedging allows you to set a known and guaranteed exchange rate for your Single Farm Payment. You can hedge your payment right up to 2012. It is important that independent and specialist financial advice is taken before considering this option.”

The strength of the UK agricultural sector within the economy is confirmed in figures from Lloyds TSB Economics Research Team. It predicts agricultural output will grow by 0.8% this year. This compares with a 1.9% decline in UK economic output in the first three months of 2009 and an expected decline of more than 3.5% for the year as a whole.

Farmers can discuss hedging and any other financial issues with both Lloyds TSB Agriculture and AMC at the Cereals Event on the 10 and 11 June at Wendy in Cambridgeshire.

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