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Sterling’s weakness increases CAP Basic Payment

Publication Date: 
7 October 2016

Sarah Baker, Senior Analyst, Sarah.baker@ahdb.org.uk, 02476 478845

The continued weakness of the pound against the euro post EU referendum will mean higher overall payments to farmers receiving their Basic Payments ( formerly Single Farm Payments) in sterling.

Currency movements over the past year

The relative value of sterling against the Euro is influenced by a wide range of factors, including the release of economic data, policy updates, and perceptions of economic and political stability. However, the impact of the referendum result on 24 June has been the biggest single influence on sterling this year. As can be seen in Figure 1, the value of sterling saw its biggest daily fall ever against the Euro following the vote to leave the EU.

Since then, sterling has remained well below its 2015 value. Prompt action by the Bank of England, including a cut in interest rates to 0.25% and a continuation of Quantitative Easing appears to have mitigated some of the effects of the vote. Nonetheless, growth forecasts for the UK economy have been revised downwards by all major forecasters, including the IMF, for 2016 and 2017. Low growth forecasts and low interest rates put further downward pressure on the value of sterling. Coupled with the uncertainty around what Brexit means for the UK economy, the value of sterling is not expected to rise significantly in the short term. This creates opportunities for exporters across all industries, including agriculture.

Payment Rates for 2015/16

The exchange rate for the Basic Payment is now set according to an average rate for September. For 2016, the exchange rate is set €1 = £0.85228, compared to €1 = £0.73129 in 2015. 

As the payment rates are set in euros, the weakness of sterling will mean higher payment rates to UK farmers paid in sterling, when all other factors remain unchanged. Compared to 2015 payments, this represents a 16.5% increase which will be welcome news to farmers.

To illustrate the impact of weaker sterling, Figure 2 sets out Basic Payments for regions in England, as set out under DEFRA’s consultation on CAP reform at 2015 and 2016 exchange rates.

Concluding comments – what does the future hold?

It has been agreed that the Basic Payment will continue to be paid to UK farmers until 2020, despite the vote to leave the European Union. This has given some certainty around income for at least the next four years.

The direction of agricultural policy is a major issue post Brexit and will be followed closely by AHDB. We will continue to share information with our stakeholders as soon as it becomes available. For information and analysis on what Brexit means for the UK agricultural industry, please read our Horizon series of publications, found here.

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