Much like exporters with a heavy exposure to sterling, farmers are concerned at the exposure of their business to the volatility of sterling, as the British currency opts out of Economic Monetary Union (EMU). Almost 40 per cent of the value of agricultural exports - £1.8 billion out of £4.7 billion - is tied up in the Northern Irish and British markets, and the sector is uneasy about any appreciation in sterling which would put it higher than 95p against the pound.
Representatives of the Irish Creamery Milk Suppliers Association (ICMSA) and the Irish Co-Operative Organisation (ICOS), told an Oireachtas committee recently that with relatively tight profit margins of between 5 and 8 per cent, and with the loss of freedom to devalue the currency or raise interest rates, sterling remaining outside of EMU is a concern.
Losses from a 10 per cent depreciation by sterling would amount to an estimated £180 million from exports alone, ignoring the impact of downward pressure on prices on the domestic food market, the ICMSA said.
However, the Irish Farmers Association (IFA) believes that the threat of a weak sterling has receded in the last 12 months. Its economist, Mr Con Lucey, says that with Ireland joining EMU at the central rate of DM2.483, the current sterling/DM rate of about 2.90 still leaves a safety margin of about 10 per cent. But he says that he would not like to see sterling falling below 2.65 DM. He also argues that the existing euro members, including Ireland, will be able to influence Britain's entry rate, if and when it enters the euro.
Mr Lucey, who is representing the agricultural viewpoint on the recently-formed Euro Changeover Board of Ireland, says that in the medium term some stability could be achieved, if Britain has to rejoin the Exchange Rate Mechanism (ERM) as a condition of being an EMU member in the second round. Membership of the reconstituted ERM would limit the amount by which it could vary in value against the euro. But sterling's entry aside, the farming community and exporters in general are entering a new competitive era of transparent pricing and free trade movement, requiring a fresh look at national economic management within Ireland. Not being able to avail of currency or interest adjustments will require a new strategy for the Irish economy, increasing the pressure to produce national partnership agreements, which retain competitiveness, balanced with prudent public finances management, the IFA argues.
Mr Lucey's other concern about EMU is its efficiency as a functioning unit, given that its monetary union element is much stronger than the economic union one. It is an inherent limitation of the system, he says, that there is no large federal budget, but rather co-ordination of member economies - in contrast to the US system where in a state in difficulty would benefit from higher payments from and lower contributions to the central budget. While the Agenda 2000 reform proposals under the Common Agricultural Policy (CAP) are more significant for farmers, an immediate concern for the IFA and other groups is the Government's 3 per cent currency revaluation in the Exchange Rate Mechanism (ERM) central rate in March, which means we will lock into monetary union at the new higher rate.
According to Mr Lucey, this will cost the sector up to £98 million a year through a combination of CAP direct payment reductions (£21 million) and the impact on CAP prices (£77 million) from January 1st. At this date the new euro conversion rate, will replace the existing green pound mechanism. CAP direct payments, amounting to £750 million, now account for 46 per cent of farm income nationally, and are particularly important for cattle, sheep and cereal producers.
But the probability of lower interest and inflation rates, and the stability of a single currency, with its consequent reduction in hedging costs and removal of currency transaction costs, will benefit all Irish exporters. Improved access to EU markets will continue to make Ireland attractive for overseas investors and the IFA is pressing for the IDA to continue and enhance its regionalisation policy. This will ensure that lower income farm families can have a future by taking part-time jobs in industry.
