By Marian Jones on Feb 17, 09 04:49 PM

Farmers are being warned that booking an exchange rate for converting Single Farm Payments from Euros into Sterling today for future use is a gamble which may, or may not, pay off.

"Farmers are being encouraged by the financial markets to enter into forward option contracts, which means booking forward an exchange rate for converting 2009 Single Farm Payments from Euros into Sterling," said Farmers' Union of Wales business development director Emyr James.

"But they should be aware of the pitfalls, as exchange rates can go up as well as down," he warned.

"What if the Euro was worth even more than 89p by the Autumn? The forward rate will not necessarily be today's rate as a view on the future value of Sterling will have been taken.

"If you choose to received your SFP in Sterling, payment is converted at the September 30 exchange rate. You may, however, opt for payment to be made in Euros and convert this by using a forward booked rate.

"The appeal of this option is that, due to a weak Sterling, the Euro is today trading at circa 89p compared with 79p in September 2008 and 69p in September 2007.

"You will need to know how many Euros you have to exchange, allowing for modulation. The forward rate will be booked for conversion during a window expiring 12 months from the date of booking; ie a March 1, 2009 booking would create a window from December 1, 2009 to February 28, 2010.

"It is important that the Euro payment is to hand for converting during the window period. If not, you will have to buy Euros at the prevailing rate to convert into Sterling at the booked rate. These rates may differ substantially.

"You cannot, therefore, afford any errors or omissions in completing the SFP application form, giving rise to payment delays.

"If you are still interested in this gamble, contact your banking relationship manager who will liaise with their treasury department on your behalf. No deposits or fees are payable but there is a small administrative charge.

"An appreciation of financial and commodity markets may convince you that a forward option contract is right for your business, but beware: all foreign currency trading comes with a health warning."

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