CAP Payments: Outlook for Farmers Improves on 2016 EUR/GBP Forecasts

A week euro to pound sterling exchange rate has seen the 2015 Basic Payment Scheme of European subsidies to UK farmers fall to the tune of 6% year-on-year.

A weaker euro to pound sterling exchange rate (EURGBP) will mean thousands of British farmers will see the amount due to them in European agricultural subsidies decline.

Data at hand confirms that in Scotland alone some 15,400 farmers will see a decline in subsidies coming from the European Union as they have opted to receive payments in pounds.

Under the Common Agricultural Policy (CAP) UK farmers will now receive subsidies under the Basic Payments Scheme which replaces the Single Farm Payments scheme.

The exchange rate for converting euros into sterling is determined by the European Central Bank (ECB).

An exchange rate of €1 = £0.73129 has been set by the ECB for the upcoming payment window of December 2015 to June 2016, a fall of almost six per cent compared to the previous year.

In 2014 the conversion rate was set at €1 = £0.77730, this down from 0.83605 in 2013.

Scotland’s Rural Affairs Secretary Richard Lochhead says the exchange rate is a notable problem for Scotland’s farmers:

“The euro / sterling exchange rate has been on a downward path over the past two years and, whilst there has been a recent modest recovery in that last few months, many farmers and crofters will have been anticipating a reduction.

Good News: The Outlook Points to a Stronger Euro

The good news for farmers though is that a number of analysts we follow are suggesting that the pound’s ascent against the euro could be about to come to an end.

Researchers at Sweden’s S.E.B have told us that the GBP is already overvalued, particularly against the euro.

S.E.B analyst Richard Falkenhall says, “this is likely to be the last leg for the strong GBP as the currency has reached levels at which historically it has been viewed as expensive”

A similar picture is held at Lloyds Bank where they see gains in the near-term but a sharp decline in the longer-term:

“We  retain our more positive view on the euro over the medium term. The euro area is, we believe, more likely than the UK to post a positive growth surprise in 2016.”

Lloyds target an exchange rate of 1.46 by year end and 1.24 by end 2016.

For those farmers receiving payments in euro to pound sterling terms (EURGBP) this equates to 0.6849 by end-2015 and 0.8064 by the end of 2016.