Tuesday, October 01, 2013

Why farmers have to hedge currency risk

One hundred years ago in 1913 the weather was also warm for the time of year with people claiming that it was too hot to play football. It all ended in a big thunderstorm here in the Midlands. According to a Farmers Weekly poll, the overwhelming majority of farmers still think they have been hit by the weather last winter and the wet and cold spring, the second in a row. I have been growing tomatoes in my greenhouse for over thirty years and this is the worst year I can remember (and, of course, I don't get a SFP!). In these circumstances subsidy payments become more important to farmers to maintain their cash flow.

Along with the uncertainties of the weather, farmers also have to face currency risk. Indeed, some of them follow the forex market as keenly as they keep an eye on the weather. The recent rally by sterling is not good news for farmers as September 30th is the day when their farm subsidies are translated from euros into pounds. (From next year it will be calculated as an average for the month). The pound has gone up by about two per cent since May when they submitted their claims.

A growing number of farmers are resorting to hedging their currency risk. According to Alick Jones, agriculture policy director at Lloyds TSB, about a third of their clients in receipt of the single farm payment hedge their currency risk. However, the Royal Society for the Protection of Birds, which receives £1m in subsidies as a big landowner, doesn't follow this practice.

It was interesting to read in yesterday's Financial Times report on this topic that on one 450-acre livestock farm in Anglesey, the single farm payment of about £30,000 represents about 40 per cent of profits. In the long run, such a dependence on subsidies cannot be healthy, as many farmers themselves recognise, but for now they are an integral part of the business model.

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