Business Clinic: What we know already about 2019 BPS rates

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

Here, Ashley Lilley, director of food and farming at Savills, advises on future subsidy rates.

Q Can I assume that our government will simply look over the hedge in 2019 at the subsidy values in euros and then convert into sterling at the going rate, given its commitment to maintain support at same level?

The National Audit Office states that the UK will continue to contribute to the EU’s annual budgets in 2019 and 2020 as if it had remained a member state.

By implication, the UK will continue to receive payment via the EU for the subsidy. However, if no agreement is reached this expectation might evaporate.

Seven-year transition

While the seven-year transition period starts in 2021, the agricultural bill allows adjustment to financing. This introduces another threat.

A euro definition for the subsidy is not as odd as it sounds. Future UK tariffs applied to imports from the rest of the world and to imports from the EU in the absence of agreement will continue to be stated in euros.

In the longer term, there is no logical reason why subsidy payment should be defined in euros.

It adds complexity, EEA countries, such as Norway, are not within the CAP and payment rates across Europe vary enormously.

Does it matter? For 90% of farmers not really. English farmers can be confident that the payment will be in the same order as it is now and for Scotland and Wales the progression will continue as expected.

There may, or may not, be changes with the exchange rate but there always have been.

What about fixing exchange rates?

Q I usually forward fix my BPS payment to reduce the risk of exchange rate movements. Should I do this for 2019-20?

For the relatively few farmers that manage the subsidy exchange rate there is an issue.

We might expect that the sterling euro rate will be particularly volatile over the next year and consequently a euro-defined subsidy would vary in sterling terms.

Exchange rates are fixed:

  • So that the subsequent subsidy payment is at a known exchange rate that suits the business, rather than the default September rate (both are like selling all the wheat crop on one day although in the former, the farmer choses the day); or
  • To average the positive and negative currency movement to achieve an average of two or more exchange rates (the equivalent of selling wheat on two or more days).

No doubt, there are also speculators gambling on strengthening or weakening sterling.

While the 2019 subsidy may be defined in euros, it is not certain. It will become clearer and it would be worth waiting before taking action.

Exchange rate threat

However, the subsidy is only part of the farm output and the remainder is equally affected by the exchange rate.

The use of wheat options helps manage risk of currency movement and changes in supply and demand so might prove a useful substitute.

Selling forward can also help manage exchange rate risk, although consider whether the imposition of a tariff would raise or lower the price.

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