Navigating FX risk in the global agricultural supply chain

Understanding FX risk in agriculture

Foreign exchange risk (FX risk), also known as currency risk, is the financial risk that comes from the fluctuations between two different currencies. Simply put, it’s the potential loss that may occur from an international transaction, investment or business activity that involves more than one currency. Asset value, liabilities, income and expenses are all affected by FX risk and could face either gains or losses depending on which currency the exchange rate favors at the time of the transaction.

Components of FX risk

FX risk can have a significant impact on suppliers, buyers, investors and corporations within an international market. It’s important to know the different components of FX risk to better manage and mitigate the effects efficiently. This creates protection of financial stability and profitability for members of the global market. This can be achieved through proper risk assessment, hedging strategies, and staying informed about currency market developments.

Transaction risk: This FX risk occurs when a financial transaction is dominated in favor of one foreign currency. If the exchange rate between the foreign currency and the domestic currency changes between the time the transaction is agreed upon and the time it is settled, it can result in gains or losses

Translation risk: If a company is multinational, it could be at risk for having assets and liabilities in multiple currencies. In this case, the company needs to consolidate its statements and decide the standard currency to be used going forward. Fluctuations in exchange rates can impact the reported value of these assets and liabilities and, subsequently, affect the company's financial position.

Economic risk: Operation exposure is impacted by the exchange rate fluctuations on a company's future cash flows and profitability. Exporting goods to another country when your domestic currency is stronger results in lower profit (and vice versa).

Interest rate risk: Interest rate differentials between two currencies can influence FX risk. Changes in interest rates can affect the attractiveness of holding assets or liabilities denominated in a particular currency, potentially leading to fluctuations in exchange rates.

Impact on global agricultural supply chain

In the global agricultural supply chain, understanding the impact and knowing how to manage FX risk is critical for success.

Global trade: Being a global business means there are buyers, suppliers and farmers from all over the world. So inevitably you’ll have to deal with at least one other currency when conducting transactions. And according to Eurochange, there are 180 different official currencies around the world.

Price volatility: Agricultural product prices are inherently volatile. When you add currency fluctuations on top of that, it can create significant uncertainty in your revenue.

Long supply chains: Supply chains come in all different sizes. From the farm all the way to someone’s plate, there are many transactions that could happen simultaneously and occur with different parties. Buyers and sellers need to be aware of who they’re trading, what currencies they use and what gains and losses they might face due to the exchange.

Managing FX risk: Agricultural challenges

To avoid the potential risks of poor or inefficient FX trading, utilize resources that help manage the currencies and pricing throughout the supply chain transactions.

Conversion tools: Use real-time currency conversion tools. Having these on-hand when negotiating with international buyers or suppliers gives you the most up to date information on the current exchange rate empowering your strategy and negotiating skills.

Price transparency: Access to comprehensive data on pricing of products guides informed decision-making and helps set prices that could account for potential currency fluctuations.

Market insight: Staying current with market trends and new policy changes provides insights into how currency movements can affect the market.

Diverse network: With a diverse network of buyers and suppliers, there are more options to trade with companies that use your preferred currencies.

Hedging strategies: Hedging is a financial strategy used as a safety net to navigate unexpected market fluctuations and minimize potential losses. Forward contracts, options, or currency swaps are often used as tactics to hedge against FX risk.

Resources for FX risk management

FX risk is a factor that everyone participating in the global market should take into consideration. It’s not something to fear though. With the right tools, it can be simple to navigate its complexities with ease.