Business Clinic: How can I protect my business from currency volatility?

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Tom Atkins from Savills’ food and farming team offers advice for those wanting to protect themselves from currency changes.

Q: How can I limit my risk when currency is volatile?

A: One of the benefits of a weak pound is that the European Central Bank has set the euro:pound exchange rate at €0.85228/£1 for the 2016 BPS payment, a 16.5% increase on the 2015 BPS rate. 

Tom Atkins
Savills, food and farming team

This is good news but claimants need to be thinking about making the most of their 2017 Basic Payment Scheme income.

You have a choice to receive it in sterling or in euros.

Electing for an euro payment involves ticking box B1 on your BPS form. 

However there is much more to this than simply receiving your BPS payment in euros or pounds.

Being paid in euros provides you with the ability to fix a rate through currency markets when rates are most favourable. 

See also: Barn conversion – residential or commercial?

In contrast, being paid in pounds means your rate is set based on the average September exchange rate.

When the pound is historically weak this is an exposed position as it offers little protection again the possibility of the pound strengthening by September, which would in turn reduce the value of your payment.

From a historical perspective, the euro:pound exchange rate is extremely favourable with the euro trading 0.012p off a 10-year high against the pound.

If these rates last into May, opting to take payment in euros and fixing your rate on the currency markets to potentially benefit from good rates should be considered.

This strategy offers certainty of payment and protection against the pound strengthening and affecting your payment negatively.

So, don’t just “tick the box” – you need to understand euro:pound exchange rates, know what a good rate is and understand the risk management tools foreign exchange markets offer and how this could benefit your business in 2017.

Speak to your financial adviser or bank manager.      

Inputs

It is important to watch currency markets and understand how they affect your input costs.

Sterling’s depreciation against the dollar and the euro since June has led to rising costs, especially for feed, machinery, fuel and fertiliser.

To mitigate against potential further rises into the winter, consider forward buying strategies.

This offers the ability to buy now at today’s price but make the payment later in the year.

Alternatively, fertiliser and fuel pools can be successful in concentrating farmer buying power and can offer the expertise to manage currency risk.

Speak to suppliers and research forward buying options and tactics and understand how these could limit your business’ exposure to rising prices as a result of negative currency movements. 

Outputs

The weak pound has improved the competitiveness of UK exports generally and cereals in particular, in domestic and overseas markets, lifting prices in the face of the current supply side glut. 

However if the pound strengthened and oversupply continued, there could be a negative effect on UK cereal prices.

To mitigate against this potential, selling crop forward to protect against the possibility of negative currency movements should be considered while the pound is weak. 

However, you need to be careful this early in the crop season (or beyond if committing harvest 2018 crops), with quality and yield unknown. 

In most cases you will be entering into a contract to provide a specified quantity and quality regardless of what you produce on-farm.

This risk can be mitigated by seeking out contracts based on the produce of a given area rather than a set quantity.

It is also worth checking through the contract terms of your buyer – while most combinable crop contracts are based on industry standard terms such as the Agricultural Industries Confederation No 1 Grain contract for first buyers, each merchant or co-op usually overrides certain elements of this contract, for example on tolerances regarding contracted tonnage.

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