Farmers should consider forward fixing exchange rates to reduce risk, says Lloyds Bank

Farmers preparing to submit their claim for the 2016 Basic Payment Scheme (BPS) are being urged to consider how they could reduce their exposure to exchange rate losses when converting funds from Euros to Sterling.

Andrew Naylor, head of agriculture at Lloyds Bank, says producers opting to receive their subsidy in Sterling will be subject to a Euro/Sterling exchange rate based on the average throughout the month of September, whereas those receiving it in Euros have more flexibility over conversion date.

“Both have their own pros and cons,” says Mr Naylor. “If you’re comfortable with the average exchange rate provided by the Rural Payments Agency, receiving Sterling removes the need for you to carry out a separate currency exchange on receipt of the subsidy or at a later date.

“But receiving the funds in Euros gives you flexibility around the date the currency exchange is carried out. For example, you can choose to hold the funds in a Euro bank account and exchange in several months’ time, allowing you to benefit if the rate moves in your favour. The downside with this is that the exchange rate could move against you.”

Mr Naylor says that over the past five years, the exchange rate has fluctuated between £0.904:€1 and £0.694:€1.

“The difference between highest and lowest exchange rates over this period could change the value of a subsidy payment by as much as a fifth. Even for the 2015 payments, a farmer opting to receive a €100,000 claim in Sterling would have received £73,129, based on the September 2015 exchange rate. If the payment had been received in Euros but held until early April to be converted, the recent weakness in Sterling would have lifted the value of the payment to around £80,000. But you have to be aware that the exchange rate could have moved the other way.”

A third option, he says, is to opt to receive the funds in Euros and then forward fix the rate at which the currency will be exchanged. “While that would make it impossible to benefit if the exchange rate moved in your favour, knowing what you will be receiving in Sterling does bring certainty in at least one aspect of the business at a time of significant volatility for the sector. It’s also possible to fix your exchange rate long before the Rural Payments Agency fixes its Sterling rate.”

Mr Naylor adds that anyone seeking to take up this option should talk it through with their bank manager or financial adviser before making a decision.

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