15 January 1999

Intervention exchange risk

CEREAL growers will have to shoulder foreign exchange risk when submitting grain to intervention as long as sterling remains outside the euro.

Daily intervention calculations have replaced fixed green rates, making support prices much more volatile, says the Home-Grown Cereals Authority.

For example, last November and December, under the old system, the buying-in price changed only once, increasing by 70p to £84.61/t. But, had daily exchange rates been used, intervention would have ranged from a low of £83.30/t to a high of £85.75/t – a spread of almost £2.50/t in just a couple of weeks (see graph).

Fluctuations of this sort could play havoc with merchant tenders, warns the HGCA.

The rate used for calculating the intervention price is the £:euro exchange rate prevailing the day before grain is delivered to store. But delays caused by paperwork means delivery can take place up to a month after the merchant makes the initial offer.

Faced with such volatility, traders will be looking to source on open-ended contracts, where the ex-farm price is fixed once grain has gone into store. "The risk will therefore be shouldered by the farmer," says HGCA economist, Gerald Mason.

By way of consolation, intervention is likely to be a much less important market this season. So far only 70,000t of barley has gone into public storage, compared with 1.25m tonnes last season.

Traders are also in discussion with the clearing banks to try and establish a hedging mechanism to deal with the foreign exchange risk.

The HGCA also cautions against rushing into euro loans – despite the obvious attraction of 3% interest rates in the euro zone. To service a loan, farmers will require a genuine euro income stream, and that is not likely until area aid is paid in euros sometime after 2000.

"In theory it will be easy enough for merchants to pay farmers for their grain in euros," says Mr Mason. But that would still be subject to risk, as companies would simply convert the sterling price of grain into euros using the daily exchange rate. Farmers would therefore find their euro income going up or down, depending on the performance of sterling, quite apart from the price of grain.

Any advantage from a lower interest rate is also likely to be short-lived, says the HGCA, as UK interest rates are expected to fall towards the euro-zone level of 3% in the next two years. &#42