Single farm payment hedging

The single farm payment (SFP) scheme was introduced on January 1 2005, as part of the package that reformed the Common Agricultural Policy (CAP). Payment is set by the Payments Agency on September 30th.

David Jackson, Director of North East, answers some common questions from farmers about 'hedging' their SFP as a form of insurance against potential poor exchange rates.

SFPs vary according to exchange rates. If you exchange all your funds in one day, and the rate moves in your favour the next day, you may regret your decision. The result is the SFP may be less. Equally, you could have benefited from a favourable rate the same day. The fact is, the rate you achieved may get better or worse, but it rarely stays the same. Many people hedge by spreading the timings of their exchanges so that the exchange rates are different.

Your SFP is originally denominated in Euros, regardless of whether you want the payment in Sterling or Euros. Receiving it in Sterling means that it is exchanged automatically using the 30 September rate. The underlying exchange rate risk is still there, regardless of whether the exchange takes place by default on 30 September (giving you Sterling) or you receive the SFP in Euros and exchange it into Sterling yourself.

You can hedge in both Euros and Sterling. We've helped many farmers with Sterling SFPs to secure the value of their payments. We can provide hedging for those who choose to receive their SFP in Sterling and for those who wish to receive Euros.

Hedging your SFP locks it in so you have a known value. If you're happy with the exchange rate you chose, then you have eliminated the risk of a poor exchange rate, giving you a less attractive Sterling value, i.e. you make a loss. Hedging SFP aims to reduce risk, not increase it.

This is another form of speculation. A certain figure may give you a larger return on your SFP, but what if it doesn't reach that rate? What if you turn down the opportunity to hedge at a lower rate, which would still have been an acceptable amount for your business? What if your SFP subsequently exchanges at a rate well below your preferred one (and below the point at which your farm breaks even)?

Our agricultural business management team can help you find a product, but you'll need to be clear on your preferred minimum exchange rate. If you know this, we can help structure a product that meets your needs.

Hedging your SFP is not about trying for the best rate; it's about securing an appropriate rate for you. Doing nothing could have delivered a better exchange rate for your SFP, but you could have also risked a lower exchange rate. It's your attitude to risk in your business that will determine whether hedging is right for you. Don't forget, you don't need to hedge all of your SFP; many farmers hedge only part of it.

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