Exchange rates cause farmers’ subsidies to shrink

Farmers who receive EU subsidies stand to lose out if they don’t account for shifts in currency exchange rates.

Subsidies like the Basic Payment Scheme are paid to farmers from the EU, with the amount each individual receives being based on a number of factors – including how much land a farmer has, the levels of animal and public welfare that they maintain and their ability to operate sustainably.

The amount that farmers receive is set in Euros by the EU. However, farmers have the option to receive their payment in sterling instead. The EU calculates the amount in sterling that the farmer will receive based on an exchange rate defined by the European Central Bank at the end of September each year.

However, farmers do not receive their final payment until much later, meaning that the amount they receive is based on a historical exchange rate.

“The delay between the BPS exchange rate being set and payments actually being made is an issue for farmers and could end up costing them thousands of pounds,” said Brian Harris, Chief Product Officer at Currencies Direct, a foreign exchange and currency management service.

“However, the fact that farmers can elect to be paid in Euros is a great opportunity for them to mitigate this risk. Doing so means that farmers ultimately have more flexibility. A good currency management service can help them secure the best possible EUR to GBP exchange rate to ensure they don’t lose out.”

“For example, farmers can use a hedging product like a forward contract, which is essentially a guarantee from a FX provider to buy a certain amount of a currency at a set rate and on a specific date in the future. This means that farmers can choose to be paid in Euros, then take out a forward contract on that payment at a fixed exchange rate. In this case, farmers are able to plan ahead with certainty around the size of the payment they will receive.”

Now, new regulation that came into force at the start of the year may see some FX providers leaving the marketplace and reduce the number of counterparties available to farmers when they look for a foreign exchange provider.

The newest round of regulation under the Markets in Financial Instruments Directive (MiFID ii) places new requirements on many financial services companies, requiring them to be more transparent in their reporting in an attempt to create a more open and evenly-balanced marketplace.

However, some smaller providers may be unable to meet these new requirements, ultimately resulting in them discontinuing hedging products that farmers have used in the past.

Larger firms and banks look set to remain active in the marketplace, but the pool of choices available to farmers is likely to shrink.

Currency conversion services are offered by banks and many subsidy recipients do use them. However, specialist FX providers may offer more favourable exchange rates and tailored services to their clients.

Richard Batty, Company Secretary at Reuben Wilson and Son, a farm in West Yorkshire, said: “I do think there’s a lack of awareness among the farming community about the fact that BPS payments are available in Euros. Not many people know about it, or they don’t know the benefits it can have.”

“We’ve always chosen to receive our payment in pounds because we thought it was easier – we never really looked into drawing it in Euros. Now that I know of the benefits it could bring I’d definitely think about taking the payment in Euros and using an FX provider to transfer it back into pounds.”

Christopher Thyer, Rural Associate Director at GSC Grays, an independent firm of chartered surveyors, land and estate agents, said: “Subsidy payments like the BPS are hugely important for farmers and currently make up a considerable proportion of their income. With commodity prices becoming increasingly susceptible to events across the globe, it’s good business practice for farmers to de-risk their business where appropriate to do so. By taking the Basic Payment in Euros, it provides an opportunity for farmers to maximise the value of the payment whilst being able to obtain some certainty as to how much they receive. Not all farmers even consider receiving their Basic Payment in Euros and we’d encourage the farming community to consider this option and make an informed decision around what’s right for them and their business.”

“The requirements under MiFID ii mean that some providers may have to alter their product offering, and that farmers may be in a position to shop around for a new FX partner,” explains Brian Harris.

“We’re in a period of uncertainty. Britain is getting closer to leaving the European union and we still have no clarity around whether these subsidies will continue to be paid.

 “Farmers should capitalise on them while they can and finding an FX partner is a key part of that. In light of MiFID’s changes, that might mean that some farmers need to find a new partner. If that’s the case, it’s important that farmers don’t delay. Losing money to unfavourable foreign exchange rates is a totally avoidable expense and help is out there to ensure farmers make the most of their entitlements.”