Farming News - How the farming industry can manage currency fluctuations

How the farming industry can manage currency fluctuations

09 Apr 2019
Frontdesk / Finance

As the UK prepares to leave the EU, Lee McDarby, Director of Corporate FX at moneycorp explains why the farming community should have a plan around currency exposure.

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Brexit is set to change the landscape of the agricultural sector. Leaving the single market means farmers could lose access to their current supply and distribution chains, as well as their seasonal workforce. It’s unsurprising therefore that a study by the National Farmers’ Union found that farmers’ short-term confidence has turned negative while mid-term confidence about their business prospects has hit an all-time low.[1] Whilst the conditions in which we will leave the EU are still uncertain, what is certain is that UK farmers will need to become more focused on price sensitivity and risk management to prosper.

Why farmers need to take currency exposure seriously

Farmers and agribusinesses are used to planning around all types of risks, from unfavourable weather and supply chain disruptions – to ever changing customer consumption habits. However, a risk that most farmers don’t consider but should, given the international nature of agribusiness, is currency fluctuations.

Regardless of whether you are importing machinery from China or exporting grains to Europe, at some point your business will have to make or receive a payment transaction to or from a foreign partner. It is at this point that currency fluctuations become real.

Whilst a weak Pound may be favourable for exporting produce - as your product is cheaper for foreign buyers - it is detrimental if you are importing machinery or materials from abroad, as you will be forced to accept poor exchange rates.

The loss of protection from the Common Agricultural Policy and the financial support of the Basic Payment Scheme (BPS) bring even more uncertainty to the industry. The BPS is the biggest of the EU’s grants to the farming industry, and with 55%[2] of UK farmer’s income coming from the subsidy, the change in policy will affect farmers up and down the country.

Currently, farmers can choose whether to receive the BPS in Sterling or in Euros, and many choose Euros – taking advantage of seemingly favourable rates – before exchanging it into Sterling. However, some farmers are unwittingly devaluing the payment by accepting poor exchange rates.

Whilst the future of the BPS is uncertain, farmers should make sure they make the most of any outstanding payments by consulting a currency expert such as moneycorp.

Unprecedented fluctuations in foreign exchange

We are in a period of unprecedented fluctuations of the Pound as a result of Britain’s vote to leave the European Union. In the months following the EU referendum the Pound slumped by 15% against both the Euro and the Dollar, and although there have been ups and downs since, Sterling has never fully recovered. In normal times currency fluctuations would have a moderate effect on the industry, but thanks to the extent of the shifts in the Pound, it is having a significant impact on farmers’ bottom lines.

Using a currency expert

Currency markets are volatile and buying currency on the wrong day can find farmers spending considerably more than they should be. Many agribusinesses continue to use their bank to make overseas transfers, but what they don’t realise is that foreign exchange experts such as moneycorp can offer better rates and help monitor the markets, ensuring they have a better chance of buying foreign currency at the right time.

The principle behind hedging is fairly simple. With a deposit, agribusinesses can set up a “forward contract”, which allows them to lock in an exchange rate for a period of up to two years. 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.

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 they can pair it with a stop-loss order, specifying the lowest limit they are willing to accept, allowing them to protect profit margin while also having the opportunity to take advantage of movements in the market.

Turbulent times lie ahead

As the extended deadline looms closer with no clear agreement in sight, the chance of the UK leaving the EU without a deal is looking possible. This would be the worst case scenario for Sterling and could see it fall to levels that will dwarf those that followed the referendum.

Agribusinesses which haven’t prepared for this scenario are likely to be putting their margins at risk. Take a proactive approach and make sure your business isn’t left exposed to currency headwinds.