6 November 1998

How British farmers can use the euro profitably

Economic and Monetary

Union will have a direct

impact on farmers whether

they like it or not.

Francis Mordaunt of farm

business consultants,

Andersons, looks at the

possibilities

BARRING a political disaster of cataclysmic proportions, Economic and Monetary Union, or the single currency, will be with us in two months time.

From Jan 1, 1999, 11 member states will have their exchange rates irrevocably fixed against the euro.

Initially, even these participating countries will continue to use their own national currencies, until euro notes and coins are issued in Jan 2002. But non-cash transactions, such as invoicing or bank transfers, will be made in euros from day one. Dual pricing in shops will also be commonplace.

So far the UK government has exercised its option to stay outside the euro, and is likely to remain so until after the next election, probably in 2001.

But, even on the outside, UK farmers should be able to opt for euro payments. For example, many of the big grain merchants, milk buyers, supermarkets and other international traders should be able to pay their farmer suppliers in euros soon after Jan 1, 1999.

The new agrimonetary arrangements, currently being thrashed out in Brussels, should also pave the way for UK farmers to receive their direct income payments in euros, though there are many practical difficulties to be overcome first.

In particular, MAFF points to the logistical problems of having to run two computer programmes for IACS payments, one dealing with sterling and one dealing with euros.

Farmers may also have to signal well in advance which denomination they wish to be paid in. This then raises the question as to whether UK farmers will be allowed to take just some of their IACS payments in euros.

In reality, they will probably only want part of their aid cash in this form, so as to match their receipts with their likely outgoings. (Many farm expenses, such as labour, rent or tax, will only be payable in sterling.)

Without this flexibility, as the proportion of income from direct subsidies increases under Agenda 2000, farmers could end up with a surplus of euros in some accounts, carrying an unwanted exchange rate risk.

But assuming these problems can be overcome, UK farmers should soon be able to use euros to purchase inputs such as fertilisers, sprays, feeds and machinery at more competitive Continental prices.

Euro accounts

In anticipation of a developing influx of euros, most UK banks are now offering farmer clients euro accounts. The advantages are obvious:

&#8226 Cheaper finance, with short term interest at almost half the current rate in the UK, (though differentials for fixed rates are much narrower).

&#8226 No currency conversions, making it cheaper and easier to buy inputs abroad.

&#8226 Reduced currency risk when borrowing in euros. (If the £ weakens, the cost of repayments will increase, but so will the income stream.)

But there are also disadvantages, which make it worthwhile thinking twice before opening a euro account.

&#8226 Interest savings are likely to be short-lived, perhaps only four years if the UK joins in 2002.

&#8226 The euro income stream may be enough to cover interest payments, but what about the outstanding capital? That will still be exposed to exchange rate risk.

&#8226 There may be a penalty for early repayment of an existing sterling loan.

&#8226 Income flow in euros may be time limited, for example just once a year, which may make it difficult to service payment dates on euro loans

&#8226 Interest on credit balances will be lower in euro accounts than sterling accounts.

&#8226 There will be conversion costs when it comes to switching euros back into sterling, if that money is needed to meet other farm costs.

&#8226 Operating both euro and sterling accounts will add to the administrative burden in the farm office.

Despite these pitfalls, short term interest rate savings will inevitably attract farmers to take out euro loans. Major buyers of farm commodities are also likely to favour suppliers who can work in euros.

But euro loans should not be arranged until a suitable income stream is secured, either from EU subsidies or though the large corporate buyers.

The most secure source is likely to be Brussels. And once Agenda 2000 is up and running, farmers will have a clear idea of their euro-payments, at least until 2005.

What happens to subsidies after that is anybodys guess. But by then it is almost certain the UK will have joined the single currency and then people will have no option but to operate in euros.

&#8226 This report is taken from an Andersons technical note, Economic and Monetary Union – The Implications for UK Farming Business, available from Michelle Turnbull on 01664-567766.