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The good, the mixed, the worrying - three Brexit effects on world ag

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The UK may be a smalltime agricultural producer - but its vote to leave the European Union has widespread implications.

Farmers, traders and consumers worldwide will see ripples from the UK's hammer blow wash up on their fields, silos and mills.

Agrimoney will focus on three – one good, from an agricultural investor's perspective, one mixed – and one plain worrying.

Tangible asset

The good is the potential support to land prices, which often do best in times when other sectors are struggling, as they did in the early years of this decade.

Land is seen as a safe haven asset – the type which might be expected to outperform if the shockwaves from Brexit indeed choke economic growth and promote instability beyond its borders, as well as within them, as some commentators expect.

Other safe havens, such as gold, which some investors view as a proxy for farmland in value terms, and government bonds, have already found price support.

And the likelihood of the period of low interest rates being getting an extra life will enhance financing options for investors baulking at land prices which, while below their peak, remain well above levels 10-years ago.

According to UBS, "market volatility means we no longer think the [Bank of England] will raise interest rates at the September meeting," with the bank adding that Brexit would "delay" an increase in US borrowing costs too.

The US Federal Reserve "will need time to assess the evolving economic and financial market consequences from Brexit before making further adjustments in the federal funds rate".

Currency swing and roundabout

The mixed impact of Brexit is the effect on currencies.

The rise in dollar (another safe haven asset) of some 2% on Friday is bad news for farmers in US, in cutting the affordability of their crop exports, as well as for growers in countries, such as coffee and rice exporter Vietnam, whose currencies are tied to the greenback.

It also makes dollar-denominated agricultural commodities that much more expensive for buyers.

However, their loss is the gain of producers in countries whose currencies have been sent south by the Brexit vote.

The pound has fared particularly badly, slumping by 8%, and earlier hitting 30-year lows, but big losses have also been seen in the likes of the euro, Brazilian real and Australian dollar, down 2%, while the South African rand has tumbled by 4%.

Farmers in these countries have seen their exports become more competitive – although with the boost offset at least in part longer-term by the extra costs that weaker currencies impose on imports of the likes of inputs and machinery.

'Panic buying'

As for the worrying implication, that is if the Brexit vote promotes international division, and promotes the elevation of borders into trade barriers.Array

Burma: export ban

Cambodia: export ban

China: elimination of VAT export rebate, export tax introduced

India: minimum export price, followed by ban on non-basmati rice sales

Pakistan: minimum export price

Vietnam: ban on commercial sales

Source: USDA

In fact, trade dislocations, such as export curbs or import tariffs, can bring windfalls to farmers – besides hardship to consumers - by sending crop prices soaring.

Take the tripling in world rice prices from November 2007 to April 2008, which was down to political intervention rather than any shortage of the grain itself.

"The price increase was not due to crop failure or a particularly tight global rice supply situation," a US Department of Agriculture report on the price surge said.

Instead, factors such as "trade restrictions by major suppliers, panic buying by several large importers… and record oil prices were the immediate cause of the rise in rice prices".

Curse, or blessing?

But farmers would be wrong to think that every crack in world food trade represents a seam of gold.

Take the fallout from Russian interventions in ag markets.

Sure, the country's tendency to ban grain exports in the past at times of poor domestic production has sent world prices soaring. But such curbs dented values, and returns, for Russian growers themselves.

By contrast, the country's ag import bans on many Western exporters has favoured domestic producers, who have exploited the void in domestic supplies, while spelling misery for the likes of EU fruit producers, and fuelling the downturn in world dairy markets.

Freedom first

The food sector, from farmer to processor, should hope that countries, even as they ride out the shockwaves following the Brexit vote, link their hands in free trade.

Of course, that is not always so easy when, in farming especially, different countries have such varying opinions over agricultural subsidies and import-export terms – one reason why agriculture has been such a sticking point in world trade negotiations.

If only nations could form some political union too, to try to get these problems ironed out.

But that strategy, it seems, comes with its own problems too.

By Mike Verdin

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