Webinar Recap: How Currency Volatility Impacts the Agriculture Industry

Overview of how exchange rates are determined:

The fundamental variables behind exchange rates are typically interest rates, inflation, relative income levels, trade balances, and expectations of any of these variables. With all else remaining constant, a hike in interest rates in a country should strengthen its currency in terms of another one. Higher inflation in a country relative to another would weaken its currency against the currency of the other one. Expectations of better economic conditions in a country compared to another one would strengthen its currency in terms of the other one.

Overview of the importance of exchange rates in agriculture:

A huge part of agriculture is traded globally, leading to the need for exchange rates for international transactions. When exchange rates fluctuate, the real price agreed between buyers and sellers is influenced, which changes production planning and trade flows. This applies to both end products and agricultural inputs.

In agricultural trade, sometimes sellers price their products in US dollars, and sometimes they price their products in their local currency. Either way, exchange rate movements influence their real price and bottom line.

When the seller’s price is in US dollars, and the currency of the seller strengthens against the US dollar, but the currency of the buyer weakens against the US dollar, the net effect is no change in the USD price but a decline in the trade volume. However, if the currencies of both seller and buyer depreciate against the US dollar, the net effect is a price decline, while the volume traded remains unchanged. When sellers price in their local currency, the effect is more direct. A weaker currency from the seller boosts exports from that country but hampers imports.

Overview of recent cases and outlook:

The recent hikes in US interest rates have driven most of the US dollar’s strengthening in the past months, leading to more exports from countries with a weaker currency, and as a result, lower food prices. However, most countries are facing higher input prices as a result.

The euro: This currency has depreciated 11% against the US dollar this year. Demand for relatively cheaper European exports should grow, but European imports of inputs and products are becoming more expensive.

The Japanese yen: Year to date, the Japanese yen has depreciated 19% against the US dollar. Japanese seafood exports are expected to grow, but some of their seafood imports, for example, fish fillets from Norway, are expected to decline.

The Australian dollar: Year to date, the Australian dollar has depreciated 5% against the US dollar. A weaker Australian dollar has boosted its exports throughout 2022.

The Indian rupee: Year to date, the Indian rupee has depreciated 6% against the US. A weaker rupee is expected to boost India’s exports. India to boost exports to Russia with settlements in Rupees.

The Turkish lira: Year to date, the Turkish Lira has depreciated 19% against the Euro and 27% against the US dollar to touch fresh record lows in September. The weak Lira is supportive of exports. Turkish agricultural exports during the first 8 months of 2022 were reported to increase by 20% YoY.

The Brazilian real: Year to date, the Brazilian real has appreciated 9.5% against the US dollar. The real’s strength has lowered the attractiveness of exporting some products, such as coffee, therefore increasing prices in USD terms.

The Mexican peso: Year to date, the Mexican peso has appreciated 3% against the US dollar. Mexico now has a slightly bigger capacity to import, but the stronger peso has also diminished the export attractiveness of some products.

The Russian ruble: Year to date, the ruble has appreciated 23% against the US dollar. The ruble’s strength is expected to begin fading as it is seen to be hurting Russia’s exports’ income. The stronger ruble has partially driven Russian wheat exports in July and August to fall 27% YoY to multi-year lows.

Panel discussion:

How Do Buyer/Seller Behaviors Change During Periods of Fluctuating Exchange Rates in Respective Markets?

Mevis: From the sellers’ perspective, they immediately take advantage. In African countries, once the currency weakens, sellers hike up prices, and initially, they go beyond the exchange rate percent increase. But this is not sustainable, so prices tend to match the exchange rate increase. From the buyers’ perspective, when the currency weakens, sometimes big companies will export agri-products just to get the foreign currency, not caring about margins, so there’s an increase in (domestic) prices.

Fer: Companies monitor the conversion rates every day, especially to buy dollars, since most markets where I work use USD for transactions. Now, with the weakening of the Euro, importers are looking to pay for products in advance (as they expect further weakening). People who wait are losing a lot of money.

Are There Any Preference Changes in Products Due to the Price Changes?

Fer: In Europe, cheaper is better. With the EUR/USD fluctuation in a year, South American products are now 25% more expensive for Europeans. Importers are now reviewing their import program. For example, for avocados, importers are reportedly willing to wait for Mediterranean production to start, and also they will privilege countries that are willing to trade in Euros.

Mehmet: Since Turkey’s high prices are making it difficult both to export and import, consumers are going for cheaper varieties of grain products.

What Are Some Measures of Protection Against Financial Risks Derived from Exchange Rate Fluctuations?

Mehmet: For example, Turkey is implementing a series of bans, such as prohibiting Turkish companies from invoicing in USD among themselves.

Fer: The European government is helping the end consumers through subsidies.

Mevis: The Nigerian government is restricting access for Forex to prevent the local currency from crashing further. There are a lot of incentives for exporters as well.

To view the slides, click here.