minding your business Hedges can protect the bottom line


Currencymarkets are a good riskmanagement tool for farmers if used carefully.


T


heworld’s currencymarkets have been on a roller coaster ride in recent years. In the past 12


months alone, the Canadian dollar has beenworth as little asUS$0.94 and as much asUS$1.04. That’s nearly a 10 per cent swing in only one year. Sincemany farms operatewith profitmargins below 10 per cent, currency swings of this magnitude canmake the difference between profit and loss. Exchange rates are the ratio atwhich


the currency of one country can be exchanged for that of another, explains BrendanMcGrath, national corporate riskmanager forWesternUnion Business Solutions in Victoria. Between them, Canada and theU.S. formthe largest trading block in theworld. Every day, aroundUS$1.3 billionworth of goods flowback and forth across the border. Every one of those sales requires a


foreign exchange transaction.However, this is only a drop in the bucket compared to the global currency market. It’s estimated that nearlyUS$4 trillion are exchanged globally every single day. A currency’s value is determined by


the laws of supply and demand and can change by themicrosecond. Traditionally, Canadians have been used to having the value of our dollar slowly rising and falling against theU.S. dollar, as a ship doeswith the tide. It happened at such a slowpace that farmers adapted andmade changes to their operations to adjustwithout even being aware ofwhat theywere doing. Sudden changes, though, canwreak havocwith your bottomline; they affect the price of everything you buy and sell. Changes have themost direct impact


if you’re selling your farm’s production to aU.S. or other international customer, or hedging your sales on one of theU.S. exchanges. For example, imagine you’re a Canadian farmerwho decides to lock in a price forwheat by buying aDecember 2014 futures contract on theKansas City Board of Trade forUS$7.16 a bushel. If the


14 British Columbia Berry Grower • Spring 2014


currency rates in the comingmonths swing by asmuch as they have in the recent past, the price for the same bushel ofwheat could vary anywhere between $6.77 and $7.44, depending on the exchange rate. “If you’re buying and selling


something priced in a different currency, it’s very important to have a currency hedging policy in place,” McGrath says. “No one knowswhere the currencymarkets are going – it’s a big psychological game.” Producers have three options. The


first is to do nothing. Sometimes you’ll dowell, and other times youwon’t. Buying a currency option is another possibility. An option, as the term suggests, gives a person the right, but not the obligation, to buy currency at a specific price if you happen to need it. However, buying an option costsmoney and that’swhymost people prefer to use the third option, taking out a non- deliverable forward.


“Non-deliverable forward (NDF)


contracts are becoming very popular with farmers since there are no fees involved to use them,”McGrath says. “Youmay have to put up a deposit for the forward contract, like a security deposit, but other than that there are no fees for them. Basically the price is built into themargin or spread thatwe charge.” Producers should only enter currency


markets to eliminate their exposure to currency fluctuations, saysMcGrath. If you use themto speculate to potentially increase profits, youmight quickly find yourself in financial trouble. “Use the currencymarkets as a risk


management tool,”McGrath advises. “A lot of people try to gamblewith them and end up getting caught on thewrong side. Instead of protecting the bottom line theywind up costing their business money.” McGrath says if you feel you really


want to participate in themarket but stillwant to protect yourself, you can always buy a currency option.Options allowyou to lock in your downside exposure and still give you a bit of opportunity to gain if there is any upside. Producers are advised to get


professional advice if they aren’t familiarwith the currency hedging tools. —FarmCredit Canada


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