Harvesting Stability: How Hedging can Help Farmers Secure Profits, Manage Costs, and Plan Ahead

Farming has long been a business fraught with risk. From unpredictable weather patterns to fluctuating commodity prices and rising input costs, farmers must navigate a range of challenges that can drastically affect their profitability. With margins often tight, particularly for small and medium-sized farms, effective risk management strategies like hedging are essential to ensure stability and profitability in an unpredictable market.

At Bridgholds, we understand the critical importance of hedging and how this good practice allows market players to lock in prices in advance, mitigating the risk of market fluctuations and securing consistent profits.

The volatility of commodity prices is one of the most pressing challenges for farmers. In recent years, price fluctuations in key agricultural commodities like wheat, barley, and oilseed rape have become increasingly erratic, creating financial strain on those who cannot predict or control these price shifts.

Cost of Production

• Winter Wheat: £170 per tonne

• Barley: £160 per tonne

• Oilseed Rape: £320 per tonne

(UK basis)

Despite rising costs in key inputs such as fertilisers, fuels, and feed, UK farmers have faced an average profit margin of just 3-5% in 2023, making it even more vital to lock in profitable margins through hedging.

Price Volatility

Commodity prices can fluctuate due to factors such as crop yields, global demand, and geopolitical instability. For instance:

• UK Wheat Prices: £150 to £200 per tonne over the past five years

• Feed Wheat Futures: £200 per tonne in February 2025, marking a three-month high

These price shifts can have a significant impact on profits, which is why hedging is an indispensable tool for ensuring profitability.

Hedging allows farmers to lock in a price today for a future sale. By doing so, they protect themselves from the risk of price drops at harvest, ensuring that their profits are not eroded by market fluctuations.

Let's take a look at some practical examples:

WHEAT

Consider a wheat farmer who expects a yield of 8 tonnes per hectare and has a cost of production of £170 per tonne. The market price for wheat at the time of planting is £165 per tonne. The farmer decides to hedge at £200 per tonne.

Scenario	Without Hedging	With Hedging	% Difference	Amount per Hectare (£)
Market Price at Harvest	£165 per tonne	£200 per tonne	+21.21%
Cost of Production	£170 per tonne	£170 per tonne	0%
Profit Margin	-£5 per tonne	£30 per tonne	+700%	£240 (8 tonnes x £30)

Without hedging, the farmer incurs a loss of £5 per tonne, resulting in a loss at harvest. However, by hedging at £200 per tonne, the farmer secures a £30 per tonne profit, resulting in a £240 profit per hectare for the 8-tonne yield. This demonstrates how hedging guarantees profitability, even in adverse market conditions.

BARLEY

Now, consider a barley grower with a yield of 6 tonnes per hectare and a production cost of £150 per tonne. The market price for barley fluctuates but is hedged at £170 per tonne.

Scenario	Without Hedging	With Hedging	% Difference	Amount per Hectare (£)
Market Price at Harvest	£160 per tonne	£170 per tonne	+6.25%
Cost of Production	£150 per tonne	£150 per tonne	0%
Profit Margin	£10 per tonne	£20 per tonne	+100%	£120 (6 tonnes x £20)

Without hedging, the farmer makes a £10 per tonne profit, leading to a total profit of £60 per hectare for the 6-tonne yield. However, by hedging at £170 per tonne, the farmer secures a £20 per tonne profit, increasing the profit to £120 per hectare. Hedging in this case results in a significant improvement in profitability.

POTATOES

For a potato farmer with a yield of 35 tonnes per hectare and a production cost of £100 per tonne, the market price at harvest fluctuates. The farmer decides to hedge at £120 per tonne.

Scenario	Without Hedging	With Hedging	% Difference	Amount per Hectare (£)
Market Price at Harvest	£110 per tonne	£120 per tonne	+9.09%
Cost of Production	£100 per tonne	£100 per tonne	0%
Profit Margin	£10 per tonne	£20 per tonne	+100%	£700 (35 tonnes x £20)

Without hedging, the farmer earns a £10 per tonne profit, leading to £350 per hectare. With hedging, the farmer secures a £20 per tonne profit, guaranteeing £700 per hectare. Hedging offers a clear pathway to more stable and profitable outcomes, especially for crops with higher yields.

Hedging is not just a tool for securing immediate profits, but also for ensuring long-term financial stability. By reducing the uncertainty of income, farmers can make more informed decisions about what to plant, how much to invest, and when to reinvest in their businesses. This increased financial resilience helps farmers weather market volatility, particularly in sectors like potatoes and livestock, where price fluctuations are common. (Pontes, 2024)

Incorporating hedging into long-term financial planning requires access to appropriate tools. For farmers, this might include:

• Cash flow forecasting templates To predict income and outgoings throughout the year.

  
  

• Breakeven analysis To assess the minimum sale price required for profitability.

  
  

• Margin analysis To track cost and income relationships, ensuring that hedging decisions are financially sound.

Bridgholds also offers advisory services to help farmers select the most suitable hedging products for their operations, ensuring that their financial planning aligns with market conditions.

Hedging is often perceived as a strategy for large-scale operations, but this is actual far from true and smaller farmers can also benefit from hedging through:

• Cooperative pooling schemes

  Allowing smaller farmers to access hedging opportunities in larger volumes

  
  

• Financial Futures contracts

  Designed to accomodate any volume and term, enabling farmers to hedge without the need for large-scale production

Hedging is an invaluable tool for managing risk, securing profits and planning for the future as such practice offers a way to guarantee a profit margin, even (or particularly) when market prices fluctuate. By using hedging strategies in conjunction with careful budgeting and long-term forecasting, farmers can build financial resilience and continue to thrive, regardless of market volatility.

By collaborating with financial experts, even small farmers can leverage hedging to safeguard their profits and remain competitive in the marketplace.

Contact Bridgholds today to find out how we can help you hedge smartly, plan strategically, and grow securely in any market condition.

References:

• Pontes, 2024. The Financial Futures Handbook.