For example, when ag producers sell offshore, it doesn’t take them long to learn that they must consider the risk associated with currency rates.

This article illustrates how two producers manage this type of risk.

Fruit Grower Exports to Canada

Jim Bittner is a diversified fruit grower and owner of Singer Farms in Appleton, N.Y. Jim exports processing peaches, pears and sweet cherries to Canada. He learned the hard way that without hedging, volatile currency rate movements can turn a profitable deal into a loss.

Jim says, “A danger of exporting products to a foreign country is the fluctuation of the U.S. dollar. After getting burned a few times, it begins to hurt so you find ways to protect yourself.”

“Do you sell to foreign markets — or are you thinking about doing so? If so, ask a professional for assistance in understanding and managing the risks. Your Farm Credit representative can refer you to such experts.”

Learning Experience

A big learning experience for Jim came with his sales of processing peaches to a Canadian buyer. Jim agreed to accept payment in Canadian dollars 90 days from the date of the sale. The risk that he incurred related to the fact that the value of the Canadian dollar could fall relative to the U.S. dollar during the 90-day period. This scenario would leave Jim with less profit — or even a loss — when the time came to exchange Canadian dollars for U.S. currency.

Glenn Doran, senior vice president, Farm Credit Funding Corporation in Jersey City, N. J., says, “At the start of 2003, an individual would receive 1.56 Canadian dollars for every U.S. dollar. But at the end of 2003, that ratio moved to 1.29 Canadian dollars — a significant increase in the value of the Canadian dollar.”

“Although this shift of 17 percent would have benefited a farmer who had not hedged his future receipt of Canadian dollars, ‘Murphy’s law’ would suggest that such a position might be unwise.”

Locking in Rates

According to Jim, “When we think the exchange rate is favorable to us, we lock it in by selling Canadian dollars on the futures market up to a year out. This guarantees our future exchange rate.”

What Jim does now is to contract with his Canadian buyer to be paid in Canadian dollars, while at the same time selling (“hedging”) the future receipt of the Canadian dollars through the foreign exchange futures market. This eliminates the risk of adverse currency fluctuation. If the exchange rate declines, Jim is protected. (It should be noted that if the rate improves, Jim does not benefit).

A Different Strategy

Frank O’Hara, of O’Hara Corporation, Rockland, Maine, uses a different risk management strategy by billing his foreign sales in U.S. dollars.

According to his Farm Credit loan officer, Scott Kenney, “Frank found an effective way to reduce his exchange rate risk. Although he may sell his product for Japanese Yen or Euros and assume the exchange rate risk, he negotiates with some buyers to pay in U.S. dollars. Those transactions transfer the exchange rate risk from Frank to his buyer.”

Scott adds, “Frank may get paid a little less for his fish, but by eliminating his currency risk, the playing field is leveled as he receives more consistent revenues.”

For more information, contact us at info@farmcreditwny.com today!

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