Weaker currency inflates UK market values

Published 6 February 19

The UK dairy industry relies heavily on trade with the EU, with 93% of butter and almost 80% of cheddar exports sold to EU markets. This means the UK market value for these key products is impacted not only by market conditions on the continent, but also by fluctuations in the sterling: euro exchange rate.

The increased uncertainties surrounding Brexit mean exchanges rates have become more volatile in recent months. Between August and November 2018, sterling increased in value relative to the Euro by around 2%. Most of these gains were then lost in December, with the exchange rates moving back near the 12-month average in January.

The drop in the value of sterling in December meant exporters selling into Europe would have seen higher revenues in £ terms (assuming no price change). This would have inflated the UK market value of these products as domestic buyers would have to compete with the higher returns available on the continent, or pay more to import product from the EU.

We can see what the impact of a weaker pound would be by tracking how the value of a fixed European AMPE, measured in euros, changes in sterling terms when only the exchange rate changes.

Exchange Rate Impact On Uk Market Values

At current prices, a 1% drop in sterling would add around 0.3ppl to the equivalent market value of AMPE in the UK. As we move towards the Brexit deadline the movement in exchange rates could make a significant difference to the market value of dairy products in the UK.