Caution needed before fixing exchange rates

Farmers should be cautious about committing themselves to contracts that fix the rate at which single farm payments are converted from euros to sterling, the Farmers Union of Wales has warned.

Business development director Emyr James said financial markets were encouraging farmers to gamble by entering forward option contracts, which involve booking forward an exchange rate for converting 2009 single farm payments from euros into sterling. But he said serious questions about the future strength of the euro had to be asked first.

“If you don’t take an active interest in the financial markets you might be better staying with sterling, rather than trying to make money by speculating on currency fluctuations.

Exchange rates could go up or down and the forward rate would not necessarily be today’s rate, as a view on the future value of sterling would have been taken, he said.

“If you choose to receive your SFP in sterling, payment is converted at the 30 September exchange rate. You may, however, opt for payment to be made in euros and convert this by using a forward-booked rate.

“The appeal of this option is that, due to a weak sterling, the euro is today trading at about 89p compared with 79p in September 2008 and 69p in September 2007.”

Farmers need to know how many euros they have to exchange, allowing for modulation. The forward rate would be booked for conversion during a window expiring 12 months from the date of booking ie a 1 March 2009 booking would create a window from 1 December 2009 to 28 February 2010.

“It is important that the euro payment is to hand for converting during the window period. If not, you will have to buy euros at the prevailing rate to convert into sterling at the booked rate. These rates may differ substantially.”

Mr James warned that anyone taking this route couldn’t afford any errors or omissions in completing the SFP application form, so incurring payment delays. They should also contact the banking relationship manager who would liaise with their treasury department for a small administrative charge.