Partner Article

Single Payment Scheme Payments and the influence of Sterling Euro Exchange rates

Last week, farmers across the UK found out the exchange rate which will be used to calculate support through the 2013 Single Payment scheme, writes Jimmy McLean, head of RBS agricultural services.

This decision will affect the thousands of farming businesses who to receive their Single Payments in Sterling.

Support payments to farmers in the EU were combined into a single payment a number of years ago. The single payment is set in euro.

For countries outside the euro zone, it is converted into the local currency using the ECB exchange rate at the close of business on the final business day of September. That was set last week at 83.605p to the euro.

This is an increase of 4.8 percent on the 2012 rate, which was £0.79805. This rate will be used for the majority of UK farmers, to convert the euro value of their payments into sterling.

Some farmers, who elected to receive their payments directly in Euro as part of the application process, may also have entered exchange rate contracts for a proportion of their payments. The exchange rate they have received will vary depending on the date the contract was agreed.

While the increase in the sterling value of the payments will be welcome, the net return to farmers is unlikely to increase this year. The increase of 4.8 percent is likely to be offset by the ‘Financial Discipline’ deduction, which is expected to be in the range of 4-5 percent. The actual rate will be confirmed later this month.

The single payment makes a significant contribution to the profit of UK farming. Total Income from Farming (TIFF) is the government proxy for farm profit. In 2012 this was estimated at £4704 million. Single payments accounted for £2576 million or 55 percent of TIFF.

Currency movements of the order we have seen over the past year, can have a significant effect on the amount of support received by UK farmers. In general, a 5 percent shift in sterling euro exchange rates will move the level of single payments in the UK by over £100 million.

This sort of movement is not new. Between 2008 and 2009, the exchange rate movement resulted in a 15 percent increase in payments. In 2010 it resulted in a decrease of 5 percent.

There was little change in 2011 but in 2012 there was a further decrease of 8 percent. Farmers are aware that the value of their outputs and the cost of inputs are also influenced by exchange rates. However, they have become more aware of the effect currency movements can have on their bottom line, since the single payments were created almost a decade ago.

It is possible to manage the ‘single day’ risk, by electing to take payments in euro and using a forward exchange contract. In practice, it tends to be a relatively small minority of farmers who go down this route. They tend to be the larger farmers, who have higher payments, where the impact of currency movements can have a larger monetary value.

For those who wish to explore the use of currency markets to manage the exchange rate risk, banks and brokers can provide guidance. It is, however, important to take appropriate advice, to ensure the commitments being entered are fully understood.

This was posted in Bdaily's Members' News section by NatWest and RBS .