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The euro has hit its strongest level since 2009, rising above 92p this week. And since April, the euro has rallied 12% against sterling from lows of 83p. Much of this rally centres around speculation that the EU could taper its quantitative easing programme and a better set of economic numbers coming out of the EU in recent times.
This, coupled with a weaker sterling against a basket of currencies as a result of the uncertainty around Brexit and the corresponding fragile economic environment, could see euro-sterling parity before the end of the year. But not all market analysts agree that the euro is heading for parity, with many saying that sterling looks extremely undervalued.
What does it mean to farmers?
A fall in sterling lifts prices for UK food producers helping UK farmers. Similarly, it makes our exports less competitive, cutting prices for Irish businesses selling into the UK with knock-on effects to farmers. It will also make imports from the UK to Ireland cheaper, including grain, machinery, hardware, animal medicines and crop agrichemicals.
Despite the growth in new markets, the UK remains our largest single market, accounting for 39% or €4.8bn of total agri-food exports in 2016. Half of Ireland’s beef exports go to the UK valued at €1.1bn. It takes almost a quarter of our total dairy exports and is our single largest export market valued at €857m in 2016. Over a quarter of our sheepmeat exports valued at €52m, €408m of pigmeat and €176m of forrestry exports goes to the UK.
A prolonged drop in sterling would put downward pressure on returns to beef and sheep processors and dairy co-ops over the coming months which end up inevitably passing back to farmers.
To put this in context, in April when one euro was worth 83p, the €4.8bn agrifood exports were valued at £4.0bn. Today they are worth £4.4bn or 10% more expensive or less competitive once they reach UK shores. If this happens, unless prices are absorbed, volumes will fall.
The fate of a pack of rashers
To best illustrate this, take a £3 pack of six Irish rashers selling on a UK supermarket shelf. The cost of this pack of rashers in the UK has effectively increased 10% as Sterling weakened from 0.83p to 0.92p against the euro since April. This should mean the price moves up to £3.30 for the pack of rashers.
But despite 1-2% food inflation in recent months in the UK, supermarkets are very hesitant to rise prices on UK consumers. In a very competitive market, they are most interested in driving footfall to each of their respective stores and often use meat and dairy products to do so.
Therefore, to keep Irish rashers competitive on UK supermarket shelves and at £3, the 10% hit must be absorbed elsewhere in the chain. This is very difficult to do at processor level as much of the costs have been squeezed out already. The food industry is a tight margin business operating on margins of 2-5% typically. Simply put there is not 10% in the system to take the hit which inevitably means lower prices to farmers.
Despite this, many large processors and companies are aware of currency volatility and hedge to remove as much currency risk from their respective businesses. However this is increasingly difficult to do in such volatile and uncertain times. And as the euro heads for new heights against sterling, it looks to become even more uncertain over the coming months.
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