Hedging SFP may be best way to beat volatility

However, with considerable volatility in the currency market, Sandy Hay, head of agriculture at Bank of Scotland, has advised farmers that "hedging" single farm payments might offer a degree of certainty. "The commitment to hedge can be taken any time up until payments are received, but you need to make sure you opt for payment in euros on your SFP forms," he said.

"Hedging your payments is a technique that mitigates the currency risk and manages the fluctuations in the exchange rate which can cause uncertainty for a significant part of many farmers' income."

Hay suggests farmers sell forward their euros at a pre-agreed exchange rate for settlement within a specified period. This "time option" provides increased budgeting accuracy and offers farmers many more opportunities to manage their exchange rate than taking their payments in sterling, which would achieve only the rate applicable on 30 September each year.

A number of farmers are already carrying out the hedging exercise, but the impetus this year has been triggered by recent swings in the currency market. "When the SFP first started, the Bank of Scotland was hedging payments at rates of around 69p/euro," said Hay.

"In 2010, sterling has strengthened a little, which has put hedging rates at around 85p, although earlier in the year farmers were hedging at 90p."

He believed that with issues surrounding euro confidence, arising from the financial situation in Greece and possibly other European Union states, the rate could slip further still.

Hedging contracts are flexible and can be set up for just a year or for multiple years, with an agreed window period for receipt of the SFP. "Scottish farmers have been fortunate because the vast majority are paid within the first month, but the window period allows for any unexpected delays to be accommodated within the contract."