Playing safe ‘can be a gamble’

THOUSANDS of pounds of Single Payment money could be lost by farmers who make the wrong call in the annual Sterling versus Euro debate, an expert has warned.

As the deadline looms for farmers across East Anglia to decide in which currency to receive their Single Payment, the overwhelming majority will once again opt for it to be converted into Sterling.

At first it seems like a sensible, straightforward decision but it actually contains a risky gamble, according to Claire Thomas, a treasury partner in the East of England agri-business team at Clydesdale Bank.

So, why is the annual decision such a tricky one?

“Because the exchange rate used to calculate the payment is not set until the last working day of September, farmers are effectively having to gamble on how they think the global financial markets will look a further six months down the line.

“At the moment Sterling is particularly weak against the Euro but currency rates have been very volatile and a number of factors suggest Sterling will strengthen against the Euro following the General Election in May, unless there is a hung parliament.”

The difference between the EUR/GBP exchange rate now (0.90) and our EUR/GBP exchange rate forecast for September (0.85) equates to a 5.5% movement, said Ms Thomas.

“On a payment of €100,000 that would mean a potential payment difference of £5,000, a considerable sum that any business would welcome.”

One option for farmers is to elect to receive their payment in Euros and enter into a Forward Exchange Contract for the 2010 harvest payment, and the subsequent two years if they so wish.

This allows the farmer to lock into today’s exchange rate for a future date – thereby taking control of the exchange rate for converting Euros back to Sterling instead of leaving it to chance.

The exchange happens on an agreed date or within an agreed window –and the farmer receives the benefit of today’s exchange rate.

Ms Thomas acknowledged there were exchange rate risks regardless of whether the payment was taken in Euros or Sterling.

But she added: “Forward fixing offers protection against fluctuations in the exchange rate much as a fixed-rate mortgage protects against interest rate rises. It gives you certainly over what you will receive, allowing you to budget with confidence.”