The final payments for the new Basic Payment Scheme (BPS) will be calculated in euros, as were payments from its predecessor the Single Farm Payment (SFP) Scheme. However, there is a slight difference in how the payments will be calculated. The SFP was based on the exchange rate on the last working day in September. The exchange rate for the BPS will be based on an average sterling/euro exchange rate throughout September.
Despite this difference, the payments farmers will receive for their BPS will continue to differ each year, as the value of the euro against the pound fluctuates widely. Combined with the risks of weather and commodity price volatility, a varying BPS payment is one more unknown financial element to add to a farm’s fortunes and finances.
Why should farmers hedge their BPS?
With so many variable factors impacting farm fortunes, it’s critical for a business to budget ahead and to make sure, where they can, they have a stable income. By going to the market and forward fixing an acceptable price for your BPS exchange rate (or hedging your exchange rate), you will make sure you get a guaranteed level of BPS income for the business. Of course, there may be years when you gain, and some when you don’t. But it is crucial you’ve secured the level of BPS income you know your business needs to operate smoothly.
Arable farmers are familiar with selling their crop forward. The principles of hedging your BPS are the same. You are protecting the value of your BPS payment by locking into an appropriate fixed euro exchange rate.
How should farmers hedge their BPS?
It’s important to remember that hedging is not a means to make money – although some years could turn out more favourable than others. Hedging is a way of minimising risk, establishing a fixed element of income and aiding future budgeting. Farmers need to work out what figure would be acceptable for the business and then arrange to fix. You need not hedge all your BPS. Many farmers hedge only part of it.
It’s estimated that only about 10% of farmers historically hedged their SFP. But with commodity and farm prices looking to become more volatile hedging your BPS can add an element of security to a large proportion of the farm’s income.