Strength of the pound
21. The relationship between sterling and the Euro, and between
the Euro and other currencies such as the dollar, has a two-fold
impact on the profitability of farming in this country. The strong
pound (relative to the Euro) has in recent years made food imports
from the rest of Europe cheaper and food exports more expensive.
In addition, because CAP support payments are made in Euros, they
are worth less in the United Kingdom as the pound rises in value.
The damage done by recent currency movements is illustrated in
the Figure below, which shows a clear relationship between the
recent decline in farm incomes and the strength of sterling. We
note, however, that in the first six months of 2002 the Euro appreciated
by approximately 6 per cent against the pound.
That notwithstanding, uncertainty about currency movements between
sterling and the euro may affect investment decisions of international
companies engaged not only in agriculture, but also in ancillary
Figure 2: The relationship between farm incomes and
the strength of sterling
22. However, despite the role that direct payments under the CAP
now play in determining agricultural incomes, it is important
not to lose sight of the fact that the largest proportion of farmers'
incomes has always come from selling produce in the marketplace
- albeit a market in which product price support continues to
play a role. Figure 3 contrasts the total value of agricultural
output, including all direct and indirect support payments to
farmers, with the level of spending on all forms of agricultural
Figure 3: Gross output from agriculture and expenditure
on support to farmers
Public expenditure under the CAP and on national grants and
subsidies is recorded by financial year, so 1995 refers to 1995/96
* Excludes £2,208.3 million expenditure on foot and mouth
Thus the revenue that farmers receive from farming is dominated
by the sale of crops and livestock. It is in that context that
changes in the commodity market price for farm products have had
a serious impact on farming incomes.