Webinar Recap: Currency Risks and Strategies in Agricultural Trade Amid Uncertainty

Tridge’s monthly webinar was held on November 23rd, titled “Currency Risks and Strategies in Agricultural Trade Amid Uncertainty”. This was the second webinar in a two-part series about currency risks. This first webinar, which took place in September, was titled “How Currency Volatility Impacts the Agriculture Industry”. The most recent webinar explored strategies in which currency risk can be hedged and explored several case studies. This was followed by a panel discussion where the practical application of currency risk-reducing strategies was discussed. The recording of the webinar can be found here, along with Tridge’s previous webinars. Keep an eye out for Tridge’s upcoming monthly webinars, as we explore current topics and trends in the agri-trading industry.

Exchange rates are important for agri commodities buyers and sellers, because of their impact on the bottom line of market players. There are a lot of variables in play that can influence exchange rate fluctuations. Some of them are differences among countries between interest rates, inflation rates, income levels, trade balances, and expectations of all these variables.

Risks in Fluctuating Foreign Exchange Rates in Agriculture

Transaction exposure is a particular type of risk present in agri commodity cross-border trade, it involves a contract to buy or sell commodities in a foreign currency in the short term. The transaction can be payable, which means a buyer (or importer) would need to get a hold of the relevant foreign currency to pay for that product. The transaction can be a receivable, which means a seller (or exporter) would get the foreign currency as payment, and therefore would need to convert it to its local currency.

Strategies to Mitigate Risk

Several strategies to reduce exchange rate risks were explored during the webinar. Some of the strategies include: forward contracts, money-market hedges, and option contracts.

A forward can be used to buy a particular currency, in the case of a payable, or to sell a particular currency in the case of a receivable.

A money-market hedge would involve several movements in the domestic and foreign money markets, considering domestic and foreign interest rates, and converting money only at the current (spot) rate.

An options contract can allow a market player to purchase the right to buy (in case of a payable) or sell (in case of a receivable) currency at a determined rate in the future, paying a premium for such a right.

Case Studies

During the webinar presentation, several case studies were represented where currency fluctuations led to increased risks in terms of imports and exports. Countries with a widening trade deficit have seen their currency weaken over the past months. This weaker currency is affecting some of these countries’ trade flows.

A recent example that illustrates what is happening is beef imports in Japan. As the currency weakens, Japanese consumers are paying more yen per unit of beef, despite a falling international beef price. There has been an increase in imports from regions whose currency has appreciated less against the Japanese yen relative to other regions. For example, imports of European beef have grown the most, because the Japanese yen has only depreciated 4% against the euro in Jan-Sep 2022. Japanese beef imports from regions/countries where the depreciation has been sharper, have shown slower growth or even a decline.

Analysts are expecting most currencies to continue depreciating against the US dollar in the short-term, which is favorable for agri exporters pricing in dollars and US buyers, but unfavorable for importers that have to pay for inputs or commodities in US dollars.

Panel Discussion

Tridge’s panelists, Ron, Fernando, and Ahmed were asked about their experience with recent currency fluctuations and how currency risks can be managed.

How do importers hedge against currency fluctuations?

Ron: A smart importer chooses to hedge in order to react quickly to currency swings. It is essentially a cautious action designed to protect you from experiencing the worry of "probability of losses." Businesses, whether importers or exporters, are always started with the goal of "PROFIT" in mind. This method is superior to the conventional ones since it allows for the useful freezing of previously agreed-upon pricing. There is less concern about financial loss. This approach will be important in preserving company bottom lines if it is properly understood and applied. A form of hybrid security, forward contracts or forward agreements to buy or sell an asset at a predetermined price and date.

Fernando Dupuis: One of the most interesting tools is the forward contract. It is one of the most popular for exporters in South America. The exporter looks for a long-term relationship with the bank. Unfortunately, for many exporters also in South America, they didn’t forecast the situation that happened in Europe. For importers, they have three alternatives. They buy a large amount of the most traded currency for their overseas purchases. Or what is big among large importers, they tend to freeze their exchange rates for their suppliers. And the last one, which may become popular next year, is exchange rate insurance, which is a commitment between the market participant and the bank to exchange currency at a particular time and price in the future.

Ahmed: Egypt has one of the most unpredictable markets there can be. If you are an importer in Egypt, you try to get as much stock as possible, since depreciation can happen and the market is very unpredictable.

How to reduce risk trading before negotiating with clients, and what are the strategies for agricultural trade?

Fer: It’s based on the relationship with the client. When the relationship gets bigger, then you are going to look for more flexibility. It should be a win-win situation.

Ahmed: What I’ve found useful, if you’re a buyer, is if you can give your suppliers more leverage. If you have a long-term contract, the best thing to do is to give these suppliers, of course if you trust them, give them a good prepayment before the season starts.In that case, whatever happens, they always put you in priority, because you help them secure the raw materials or other costs before they have any risks of currency volatility.

Ron: We need to do market evaluation, check current ongoing price and quality, moving average price week on week, etc. We also need to look at external factors, such as the risk of inflation; political risks; decreased market demand. There must be a thorough analysis of consumer preferences and other requirements in the export markets, along with robust testing and certification procedures to ensure quality products. Eliminating risks and uncertainties for the transactions settled in foreign currencies is very much important. It helps you understand the expenses, and in turn, aids in increasing your business value. There must be export promotion through webinars & exhibitions. Exhibition 365 by Tridge is one of them.

Is there a way to mitigate debt-related risk on agricultural products in countries managing hyperinflation and the devaluation of the local currency?

Ahmed: From an exporter's point of view, they never have their debts in foreign currency. To cover themselves, exporters make their deals in US dollars. In that case, if the currency devalues, the difference in the exchange rate will cover the losses that came from hyperinflation.

Fer: As an exporter there’s not much they can do, except two things: You take a forward or an exchange rate insurance or you deal with your client if you have a good relationship. The big ones, as I mentioned, are also determining their exchange rate for the whole season. From an importer's perspective, if you see that all the costs at the origin are increasing and you’re not able to transfer it to the final client, then don’t bring it.

Ron: People here in India are maintaining records. By evaluating balance sheets, income statements, cash flow statements, etc., a farmer or exporter can more adequately evaluate his financial performance and make more financially sound decisions regarding his enterprise. By knowing his current debt-to-asset ratio, he can make better decisions when securing loans and can possibly get a lower interest rate on loans by lowering that ratio. Managing marketing and production risk also. The production and marketing of an agricultural product creates both expenses and revenue for a farmer. By managing production and marketing risk, a farmer can reduce his risks of devastating revenue loss due to production loss or lower commodity prices.

To view the slides, click here.