Agricultural Import & Export Industries

Agricultural Businesses Run The Risk of Significant Losses

Agricultural mechanization preparing land for seeding on a sunset.

Central Bank’s Basic Payment Scheme (BPS).

Every year, farmers lose thousands of pounds through neglecting to consult a currency expert ahead of receiving their subsidies, such as the European Central Bank’s Basic Payment Scheme (BPS).

The BPS exchange rate set in September was €1 = £0.73129, but as we saw from fluctuations in 2014, a lot can change between then and when the payments are made, from December 2015 to June 2016. Already this year, since the May application deadline, the euro-sterling exchange rate has fluctuated significantly – from a low of €1 = £0.69410 on the 18th July to a high of €1 = £0.74767 on the 13th October.

On average in 2014, BPS recipients received 15% less on the Single Farm Payment (SFP) subsidy over the twelve-month period, due to startling changes in the sterling-euro exchange rate.

For example, March 2014 saw average exchange rates of €1 = £0.83170 whereas September 2014 averaged exchange rates of €1 = £0.79057. With a €50,000 BPS payment this represents a difference of £2056. Clearly, there is potential for significant losses if farmers are caught on the wrong side of an exchange rate move.

Support at Each Stage of The BPS Process

Currency Hedger works with many farmers to support them through every step of the BPS process and to mitigate the risks around exchange rate fluctuations. Before the May deadline, we help clients select which currency they want to receive their payments in, discussing the pros and cons of these three scenarios:

Receiving The Subsidy in Sterling

Research & Analytics

If they opt to receive the subsidy in sterling, payment will be made based on the rate of currency exchange calculated based on the average of ECB rates that September.

However, even after the May deadline, Currency Hedger can implement a hedge on their behalf, so they can control the amount of sterling they receive.

Receiving The Subsidy in Euros & Pound

Planning Strategy

If they opt to receive the subsidy in euros instead, however, they can either:

Change it into euros using Currency Hedgers Exchange rate on the day the payment is received.

This is likely to be a more competitive exchange rate than the ECB rate, but does mean that the funds are subject to that rate – meaning they could lose out due to the continually fluctuating markets and the possibility that the rate had fallen on that day. They will also be unaware of exactly how much they receive until the day that payment is made.

Forward Contract

Creating a Bespoke Solution

Book a Forward Contract at any point in the year before the payment is received. This allows them to reserve a favourable rate to exchange the euros into sterling upon receipt of payment; ensuring they know exactly how much sterling they will receive in advance avoiding any negative currency market movements allowing them to budget accordingly.

Through discussing these potential strategies and creating a bespoke solution for every client, Smart Currency Business assists agricultural clients in securing a favourable exchange rate before the BPS exchange rate is set in September, whether they receive payment in sterling or euros. This gives clients more control over the amount they receive and enables them to plan ahead.

Other Risks For Agriculture Businesses

Importing Machinery

The SFP isn’t the only area where the agricultural industry can be vulnerable to exchange rate fluctuations.

Some farmers also are required to import machinery throughout the year; and with a combine harvester costing around £250,000 and a large tractor costing around £100,000, this can add up to significant expenditure.

An unfavourable exchange rate can magnify this cost. Smart Currency Business helps agricultural clients to minimise additional costs resulting from exchange rate fluctuations – saving clients up to 4% on the exchange rate compared to a bank – and creates bespoke currency strategies for each agriculture business, based on the different risks and currency exposure they face.

How can Marketforu help your agriculture business?

Specialist currency strategies and business guidance for the agriculture sector, including specific BPS support.

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