Pound exchange rates could enjoy a fresh boost this morning if July’s UK public sector net borrowing figure paints an encouraging picture of the domestic outlook.
Many farmers are unaware that they can receive single farm payments in euros rather than Sterling. Lacking that information could be costing you thousands of pounds thanks to the way the EU calculates the exchange rate when you request that your subsidy be paid in pounds.
Why should you opt to receive your single farm payments in euros?
The Basic Payments Scheme (BPS) is the largest of the EU’s rural grants, and one you must be eligible for in order to receive other farm subsidies such as greening. It’s paid once annually to eligible farmers based upon the number of entitlements and eligible hectares they have which can be ‘activated’.
Money is paid out from the EU’s Common Agricultural Policy (CAP) to the Rural Payments Agency: the UK body in charge of distributing subsidies from the bloc.
Claims are made in May, with payments not being made until December. This delay is the reason why electing to get your payment in euros is such a crucial decision: the EU may pay you the money in December, but if you’ve opted to receive it in Sterling they’ll use an exchange rate from September.
The exchange rate used to convert euros to pounds for BPS is made up of an average of the exchange rates seen in September by the European Central Bank (ECB). If the euro to pound exchange rate has weakened significantly between September and the time your payment is made, you’ll effectively be losing money – potentially thousands of pounds.
For example, because of the extreme weakness seen in the pound after the UK Brexit referendum, the euro was able to buy far more pounds than the year before. This meant BPS payments beginning in December 2016 were around 16.5% higher than in 2015. This essentially equated to UK farmers receiving an extra £350 million from the EU thanks to the discrepancy in exchange rates.
But if the pound is strong on 30th September when the BPS rate is set and it weakens considerably over the following months, the reverse would happen to the example above and you would lose money.
Forward contracts are the easy way to mitigate currency market risk
Another reason firms may have been dissuaded from accepting BPS in euros is the false belief that protecting against currency risk is a complicated and time-consuming affair. This doesn’t have to be the case at all.
A forward contract is a simple and effective tool that farmers can use to fix an exchange rate for use up to a year down the line. When the market is particularly favourable - which would mean the GBP/EUR exchange rate being weak in this instance - you can simply ask your broker to set up a forward contract, specify the end date or date window in which you are wanting to make the transfer, and pay the deposit.
Regardless of what the market does afterwards, you’ll get your euro denominated BPS payment converted into Sterling at the rate you previously locked in. Not only does this protect you from losing money to adverse movements in the currency market, it also does wonders for your cash flow visibility. With a Forward Contract you know exactly how much money you get, making it easier to plan ahead and protect your bottom line.
MiFID II regulations to reduce hedging options available to farmers – but not from Currencies Direct
New regulations came in to force in January 2018 that could limit the number of currency brokers who can help you hedge against market volatility when accepting BPS in euros.
A new iteration of the Markets in Financial Instruments Directive, which has an acronym that is just as complicated to say and remember (MiFID II), has tightened the rules surrounding organisations offering financial instruments – the forward contracts we mentioned earlier are classed as such.
The new regulations could force many providers out of the market, but the largest and most trustworthy brokers, like Currencies Direct, are already operating in-line with, or beyond, what’s required.
Working with our hedging team therefore ensures that you can accept your BPS payments in EUR and rely on our expert knowledge and dedicated customer focus to assist you in hedging against currency risk.
Working with Currencies Direct can also see you get a competitive exchange rate when you choose to take out your forward contract – just another way accepting BPS in EUR and transferring it to Sterling via a reputable FX broker makes perfect sense.