Farmers rush to pre-book euros

Increasing numbers of farmers are choosing to lock into the current euro-sterling exchange rate, guaranteeing themselves a premium over last year’s single farm payment.

According to Charlie Ireland, a farm business consultant with Strutt and Parker, the simplest way of doing this is to book a forward contract to sell euros to a bank on 30 September 2009. “This is the day when Brussels sets the rate for converting SFP from euros into sterling. But by booking a forward contract now, it is possible to secure the current exchange rate of about 91p/euro.”

As an example, if a farmer anticipates he will receive an SFP of £45,500, he could book to sell €50,000 at today’s rate of 91p/euro.

If, come 30 September, the exchange rate has dropped to 85p/euro, it will only cost £42,500 to close out this forward contract, meaning the farmer will have made a profit on his euro deal of £3000. This will be credited to his account by the bank.

Of course, his SFP, when it arrives, will have been converted to sterling at the 85p/euro rate, so he will get less than expected. But the profit on his euro transactions will offset this loss, giving him an effective exchange rate of 91p/euro.

Mr Ireland explains that the farmer does not part with physical cash, either to book the contract or to close it out. That is done by the bank.

“There is a flipside, of course, and that is that sterling could continue to weaken,” explains Mr Ireland. “If the same rate of 91p/euro was fixed and sterling fell to 97p/euro by 30 September, the farmer would have to credit the bank with £3000. But the SFP would be fixed at 97p/euro, giving a bigger payment with which to offset the loss on his euro trade.”

The main benefit is that the forward price contract provides security and enables farmers to lock in to historically high exchange rates, says Mr Ireland. The downside is that the contract has to be closed out on 30 September, which may be several months before the SFP is received. If the farmer makes a loss on the euro transaction, he will have to cover that on the day.

For more on this story, visit Phil Clarke’s Business Blog