The good old days when being a fruit and veg supplier meant spending a large amount of time tending to crops in a field are well and truly over. As the supermarkets mushroomed, so their suppliers became businesspeople as much as growers. With global recession, wars, political instability and climatic disasters characterising the last three years, currencies have yo-yoed and importers are increasingly having to become experts in monetary trading to make sure they stay in profit.
Two years ago was a sobering time for everyone as sterling hit a record low against the euro and the cost of buying in from abroad suddenly became a huge issue for the industry. Sterling swung a massive 25 per cent from high to low and anyone left unhedged faced some serious losses. Hefty food price inflation and the recession only added to the gloom and importers found themselves poring over doom-mongering economic reports as they struggled to prevent their businesses from being caught out.
The whole affair put the issue of currency trading for the horticultural industry into a new perspective, and with the volatility that has remained in currency markets ever since businesses trading with overseas clients are now having to add financial expertise to their growing list of essential know-how. “I would say the industry had to react and respond to the major re-alignment of the currencies that took place in 2008,” says Robin Dawson, finance director at Poupart Group. “Whether that movement was dealt with well or badly deeply changed their attitudes to managing the risk.”
It is particularly important for fresh produce companies to keep an eye on currency movements, claims Money Corp senior dealer Chris Redfern. “Fresh produce clients are making the smallest margins, especially dealing with the supermarkets,” he says. “Volatility has increased because of the recession and the credit crunch, as well as so many unexpected events.”
John Smith, managing director of Greyfriars, estimates he now spends as much as 20 per cent of his time on matters relating to currency. “As about 40 per cent of my sales have some form of currency implication it represents a big area of risk,” he explains. “Most people don’t have time to make it their responsibility so I do it.” As well as poring over specialist websites and the business pages of the FT and the Economist, Smith spent months training himself to understand the intricacies of currency trading. “I have a Masters in marketing but I had no detailed grasp of economic drivers. I probably took six months to a year before I did my first trading.”
But Smith reckons the investment in time and effort has more than paid off and even pays for his salary. His strategy involves forward buying currency at a level associated with a deal he’s done with a supermarket, that’s to say he signs a contract on the assumption of a particular exchange rate and then buys forward enough currency at that level to last him the duration of the deal.
So far so logical, but sometimes you might want to twist and take advantage of currency swings in your favour. That’s when an astute understanding of markets can make you extra margin - while getting your decisions wrong can cost you your profits. “The point is that with fresh produce companies working on one to two per cent net margins at most, if the currency fluctuates by five per cent against you, you end up losing your margins.”
The danger can come when you buy what turns out to be the wrong currency. In January, Smith recalls, he had forward bought US dollars to buy sweetcorn, but when the US crop then failed he had to switch to Australian and South African supplies but found himself without any rands or Australian dollars. That had an inevitable impact on the bottom line.
Alan Frampton, co-owner of leading chrysanthemum grower Donaldsons, buys young plants in euros and flowers in dollars or euros. He says that although he only spends a few minutes a day studying the currency markets, it is an extremely important part of running a successful business. “Currency trading is no different from buying oil or gas or buying swaps - mitigating your risks has become a big deal. It’s changed dramatically and you have to keep abreast of current affairs and keep your eye on the ball and decide if you are a bull or a bear.”
Frampton likens understanding the currency markets to learning the Highway Code - complicated at first, but then it comes second nature. “There are times when I get it completely wrong but it’s all about knowledge. You have to read and know about current affairs.”
But the jury’s out on whether companies should employ someone with the specific skills to analyse the market and make the call on when to trade. The biggest players would already have experts in that area and it’s debatable whether having a currency market ‘expert’ would make a difference.
Some importers point out that financial trading is very much about sentiment - that’s to say nervy traders making snap decisions in reaction to global events - which makes it almost impossible to predict. “It doesn’t pay to have an expert,” Dawson insists. “There are websites that you can go on and watch the exchange rates. You can also move your business to an organisation which will send you daily updates. But even these people are salesmen and are guessing as much as anybody else. You get two economists in the room and get five different opinions. It’s 99 per cent speculation.”
Instead, it’s all about each individual’s ability to handle risk, Dawson claims. “Managing risk is managing the individual exposure of boxes of fruit rather than as a seasonable period. The selling side is about de-risking the financial exposure and making sure the traders provide the margin in trading fruit. The traders know exactly how much a parcel of fruit costs and the margin. I would argue that businesses in the fruit trade make money out of trading fruit not currency, so they should just find the best way of purchasing currency [for them] and stick to it.”
Part of the problem is that 2008 has made everybody jumpy, adds Dawson. “Because there was such a huge swing, everyone is now looking at every small movement. Actually, the movements have been quite small [this year].” One significant change is that suppliers who previously wanted to be paid in US dollars are now looking for sterling or euros, he says.
The view that fresh produce importers should prioritise horticulture but protect themselves from the dangers of the volatility is echoed by Jeremy Cook, chief economist at currency traders World First. “People are becoming more like currency traders every year and they are educating themselves more,” he says. “We advise clients that as soon as they sign a contract we start looking at hedging something. Their business is the purchasing and sales of fresh produce. We offer currency options, which give protection if the currency goes down but should it go up you can also benefit from that.”
Currency fluctuations, of course, affect everyone and it’s making everybody around the world question which markets they supply. With a general tightening of the global food supply, growers are finding they have more possible destinations for their fruit and veg than ever before - which makes it tough for UK importers when sterling is weak.
A strengthening of sterling may be high on everyone’s wish list, but with volatility here to stay, it is those importers with their fingers on the pulse who have the best chance of improving their margins.
DEALING WITH VOLATILITY
“This year has been a very volatile market and these are extraordinary times,” says Chris Redfern, a senior dealer at Moneycorp. He’s not kidding: 2010 has seen the exchange rates drop from $1.65 to the British pound down to the low $1.40s and has now moved up to the mid $1.50s. Against more exotic currencies - such as those used in many tropical fruit-producing nations - there have been even wilder fluctuations.
So what’s the importer to do when trying to secure currency for contacts? “Half of it’s down to luck, but there are ways to manage the risk,” says Redfern. “You always want to leave as much margin as you can when budgeting. You should speak to an expert and find out what the predicted rates are. You should also take into account how the US and UK are performing [politically and economically] and how that is expected to continue.”
While you can’t predict unknowns such as an act of God or unexpected political upheaval, by being aware of global affairs you can be right perhaps 70 per cent of the time rather than just 50 per cent if you just hope for the best, he says.
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