LMC Report: Exchange Rate Swing Threatens Industry
UK - Recent data, which shows the increase in cattle imports from ROI over the month of April, has drawn further attention to the price differential between NI and ROI and to movements in the exchange rate.
22 May 2009
2 minute read
In the second half of last year, sterling lost much of its value against the Euro. At the start of 2008 the Euro was worth less than 75p but by the end of the year its value had risen to almost 98p. However this peak was short-lived and since late January the exchange rate has been relatively stable with the Euro trading at around 90p.
With some recent speculation that sterling is bound for a recovery it is important to assess the impact of last year’s exchange rate movements on farmgate prices in NI and ROI over the last year and to consider the potential impact of any future swing in the exchange rate.
Rising Euro put pressure on ROI farmgate prices
The key impact of the currency developments in the fourth quarter of 2008 was to make ROI beef more expensive in the GB market. As GB is the single biggest market for ROI producers, this had an impact on farmgate prices.
ROI farmgate prices had been rising in line with GB prices throughout early 2008. As sterling declined in value, ROI farmgate prices also fell, allowing them to remain competitive in the GB market, whereas GB prices continued to rise.
By the end of March 2009 ROI cattle prices were only marginally higher than in January 2008. Over the same period, GB prices were up by around 30 per cent.
NI farmgate prices vulnerable to stronger sterling
The ROI experience demonstrates how Irish producers were negatively affected by the market adjusting to the exchange rate developments in the latter part of 2008.
It is now important to recognise that NI producers are vulnerable to an exchange rate swing in the opposite direction. In a market where the underlying demand trends are currently negative, the dual factors of tight supply and weak sterling are currently combining to underpin farmgate prices in NI. A sustained sterling rally could reduce the NI industry’s competitiveness and put pressure on NI producer prices.
The impact on competitiveness is illustrated in the table below, which shows that the impact of a six pence swing in the value of sterling is to make an average ROI steer £60 cheaper in sterling terms.
Further Reading
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