Lee McDarby, Managing Director, Corporate International Payments at moneycorp explores how farmers can manage the risk of volatile currency fluctuations both pre and post Brexit.

With the Brexit deadline looking likely to be extended, the Government has been accused of ‘betraying’ farmers by not taxing 88% of imports into the UK in the case of a no deal Brexit. The National Farmers Union has said without a Brexit deal, its members will face tariffs on exports whilst overseas rivals will not be taxed. The concern is that this introduces further price pressures as tariff-free and potentially cheaper imports flood the market while exports from the UK are priced out of the EU. Anxiety over potential tariffs imposed after Brexit is high, but this isn’t the only pressure on prices. Margins are also being squeezed by fluctuating exchange rates and the volatility of the pound’s value. A weakened pound can add to the expense of importing fertilizer, seed crops and machinery, and the unpredictable nature of the fluctuations make it a challenge to fix budgets and prices. One way to manage these risks is to consider hedging against foreign exchange risk.

Understanding and managing foreign exchange risk

The international nature of farming and agribusiness means payment transactions across borders; from exporting overseas to importing machinery and other goods. Each transaction is subject to currency fluctuations.

For exporters, a weaker pound may be favourable as it will in turn decrease the cost of your product for foreign buyers. A stronger pound, particularly in conjunction with the potential tariffs, could price some goods out of certain markets. The reverse is true for imports. A strong pound makes money go further whilst a weaker pound drives up the cost of goods from overseas. On the other hand, in this situation, if you are looking at importing products to the UK, you will be forced to accept poor exchange rates and potentially paying more for something.

Currency markets always fluctuate, but the uncertainty of Brexit has made the pound particularly volatile. With the spectre of a no-deal Brexit and new tariffs looming, developing a foreign exchange strategy that hedges against currency risk can help to make the most of financial resources during uncertain times. Currency exposure can be mitigated and managed by addressing the measure of risk and understanding the impact of various strategies on the bottom line.

Helping farmers navigate the foreign exchange instabilities

Hedging strategies help farmers address the impact of currency fluctuations on profits. A forward contract allows a business to lock in an exchange rate for a period of up to two years. This approach may require a deposit, but can be used when imports and exports are confirmed and can provide budget certainty. For example, if a farm which is a net importer of goods from Europe secured the pre-referendum GBP/EUR exchange rate of 1.32 (EUR/GBP 0.76) then they could have continued trading at that rate - despite the pound’s crash in value - for an additional two years.[1]

A more flexible option is a market order that allows agribusinesses to specify a target rate, and if that rate is reached the funds are transferred. There are no guarantees with a market order but it can be paired with a stop-loss order, specifying the lowest acceptable limit; this protects the profit margin while also providing some opportunity to take advantage of movements in the market.

What does the future hold?

The future of Brexit is currently uncertain and for now, the fate of the pound in the foreign exchange market is tied to the political situation. Fluctuations in the value of the pound can be addressed by using specialist currency tools. In addition, a specialist provider may provide better rates than a UK high street bank and lower fees. All those small fees for each transaction and percentage point differences on the exchange rate can really add up over the course of a year, and become particularly important in uncertain times when margins are being squeezed by currency fluctuations.

Our team at moneycorp work closely with farmers across the UK; we understand the challenges across the industry and provide expert guidance on the range of currency tools available to address these issues and the current movements of the market. We work with each client to develop a bespoke plan that is tailored to a particular business model and continue to provide support and guidance as the commercial landscape continues to change. We can’t predict what will happen next with Brexit or the pound, but our specialist currency service helps farmers make the most of their money in uncertain times.

[1] Moneycorp Financial Risk Management Limited is authorised and regulated by the Financial Conduct Authority for the provision of designated investment business