With the Rural Payments Agency due to send out this year's single farm payment forms (SP5s) in the next few weeks, farmers will once again have to choose whether to receive their subsidy cheques in pounds or euros.
Most will stick with what they know and tick the box that says "sterling". But they could be missing a trick.
Take a look at last year's payments. Had a farmer opted for sterling then, his SFP would have been calculated using the exchange rate prevailing on 30 September, 2008, ie 79p/euro. A €10,000 payment from Brussels would have translated into a £7900 deposit in his sterling bank account.
But had he opted for euros, and then waited until the end of December to change them, he could have got a market rate of 98p/euro and converted his €10,000 into £9800 - almost £2000 more.
Of course, such "skilled" dealing would require the possession of a top-of-the-range crystal ball and is not "of the real world".
But a scheme being touted by foreign exchange brokers World First suggests that...
They would then elect to receive their 2009 SFP in euros and, when the money is paid out next winter, convert it into sterling at the pre-booked rate.
The scheme is not without risk - the biggest being that sterling may continue to weaken in the coming months and, come next September, 90p/euro may seem like a pitifully small amount.
World First is also demanding a 10% deposit which, for many farmers, is not an inconsiderable sum, especially at time of such uncertainty in the banking sector.
But, at face value, the scheme looks tempting, especially if sterling goes the other way. Locking into a rate of 90p/euro should at least secure a gain of about 14% over last year's aid cheque.
| Tweet |
|
I just wanted to say that I think that the proposal is an extremely good idea. If landowners take their Single Farm Payment in Sterling they get given the conversion rate from the Euro prevailing on September 30th of the year in question. Therefore in my mind being able to lock in at the current rate by selling the Euro forward and taking the SFP in Euros is very sensible. I think that it is not just a question of ones view on the Euro going forward (only going one way) but it is an extremely proactive way of managing business risk.
Philip (Hughes)a brave man to say any market is 'only going one way' but agree that anything that provides some degreee of 'risk management' is worth exploring, particularly in such volatile times.
At smartfarmer I have been looking at this area of reducing UK farmings exposure to currency movements. My research to date suggests if you tick the euro box there is a risk of a delay in payment compared to receiving the payment in pounds. Clearly since Christmas the pound has strengthened against the euro (as I write a euro is worth around 87 pence compared to 98 pence on December 29th) which goes to show that currencies can move in both directions and current markets are pretty volatile. In addition to foreign exchange brokers most banks will contract forward often with a 3 month window (which allows for some delay in payment) and usually do not require a deposit. Your bank may also offer other financial products which allow you to lock into a minimum value but offer some upside should the pound fall against the euro again. This later type of product clearly removes an element of risk and for this reason will cost, whereas locking in now would be free but removes the possibility of any upside. So understand your exposure, understand the products available to minimise that exposure, develop a strategy which is right for your business and finally implement it (which is often the bit none of us do which is actually, I guess, a strategy in its own right!)
Dear Philip
I have had over 30 of my Clients ring me up following this Article. My advice to each of them has been to take care when moving forward with playing with exchange rates.
As we know the pound against has weakened considerably since September 2008. But over the last few days the pound has strengthened due to the countries in the Euro Zone having to admit that their economies are in a major recession as well according to my fund manager friends. It appears that are own Government have been if anything very realistic of the downturn whereas countries such as France and Germany have ben less upfront especially on their exposure of sub prime. Reality is now setting in these Euro Zone countries hence where the euro is dropping in value.
Within your article you mention foreign exchange brokers. My advise to my Clients has been if they want to take the risk to ring their own friendly Agricultural Bank Managers and ask for a euro loan today. Taking out such a loan means they can exchange the euros into pounds at today's exchange rate. They then pay interest on the money until the Single Payment is paid by the Rural Payment Agency in Euros. (NB will need to tick the euro box ad have a euro bank account).
It should be noted that if the exchange rate is the same today as when the euros are paid then the farmer will have paid interest for no gain, if the exchange rate is higher he will have lost out and if it is lower he will have gained.
It should be noted that if a farmer ticks the euro box and then sits on the money until the exchange rates are favourable and then exchanges the money to euros and makes a gain he will be subject to capital gains tax.
Any currency dealing is a risk and no one knows what will happen in these recession times.