Currency warning for machinery purchases
Farmers heading to next week’s SIMA show in Paris should carefully consider the currency implications of buying machinery in euros before committing to any purchases.
“On average it takes between six and eight weeks to complete a purchase of agricultural machinery from overseas,” says Mark Bodega of currency specialists HiFX. “Even over one month, currency rates can change dramatically with a real impact on the price.”
For example, a combine harvester priced at €250,000 would have cost £192,544 at the beginning of October 2008, but due to currency swings, would have been £12,744 more expensive by the end of the month.
When it comes to paying for overseas kit, Mr Bodega identifies a number of “currency strategies” open to the farmer. “Essentially this will depend upon whether you have access to all or part of the money at the outset,” he says.
“If you have full funds available the ‘risk free’ solution would be to buy all the euros now, thus fixing the cost at the outset. You can then deposit the bought currency to earn some interest and send payments to the dealer as requested.
“The ‘high risk’ strategy would be to buy the euros each time you are required to send them to the dealer. This means that you have no idea what the tractor is going to cost, which could induce some sleepless nights if you are on a tight budget.”
If the farmer wants to play safe, but does not have all of the money at the outset, Mr Bodega says the solution is to buy one or more forward contracts. “It means, if you like the look of today’s exchange rates, you can buy the currency now and pay for it later, when you need to make the individual stage payments.
“You will be required to pay a 10% deposit now and the 90% balance upon the maturity of the contract. For example, if you wish to buy £50,000 worth of euros, but do not need to send them for three months, you can agree the exchange rate now, place a £5000 deposit and pay the remaining £45,000 balance in three months.
“If the exchange rate moves at all in that three-month period this will not affect you, as you have bought currency at the originally agreed rate.”
| WHICH WAY IS CURRENCY GOING? |
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| Over the volatile Christmas period, the sterling/euro exchange rate reached a low of 1.02. Since then it has rallied, reaching 1.14 this week. Where will it go from here? “Overall, sterling is still chronically under-valued and, therefore, a larger correction may yet unfold in the weeks and months ahead,” says HiFX currency strategist Marc Cogliatti. “However, history shows this does not mean that markets will automatically buy or sell a currency swiftly back towards equilibrium.” “It should also be remembered that sterling is still in a long-term downward trend against the euro and we must respect that.” “The key theme as we head into 2009 is likely to be volatility. Liquidity in the markets is still very thin and any move is grossly exaggerated. We could easily see a range of 1.00-1.20 in the first quarter of 2009, which would normally be unheard of for what was previously one of the most stable of currency pairings.” |
