John Taylerson, Sustainable Scale Up Cluster Lead, looks at the implications of the weak pound on Welsh food or drink businesses and what actions businesses should be taking.
What happens when the pound is weak?
There has been lots of media attention on the weak pound recently and the effect on all businesses. When the pound slides in value, put simply, you need more pounds to buy the same amount of imported goods which businesses may be using as ingredients or inputs into their products. That may be the bottles from Portugal or Egypt that you use. Or it could be the ingredients like skim milk powder, sugar or flour, because these products are internationally traded. If they are worth more abroad than a product produced just down the road from you, they will be offered to the highest bidder who maybe from a non-sterling zone, because the currency they use has more buying power as a result of the pound weakening.
Energy costs are particularly affected by a weak pound; the Brent crude quoted price in Dollars means the weaker pound buys less oil and gas; and conversely, oil will be more affordable to those stronger currencies who can buy dollars and will secure supplies, unless we pay more.
Silver linings?
We often hear that a weak pound makes our exports more attractive as they appear more competitive than our international rivals with stronger currencies. But this is not always the case as exports are often agreed ahead on a fixed price basis and so are unable to take advantage of a weakening pound. Also, the inputs that make up the products being exported often include inputs that we imported, meaning that those input costs may wipe out the export advantage.
Sounds like you can’t win?
Hedging can lay off the risk of currency movements. In fact, as usual it is just common sense. If you know you are buying ingredients and packaging in a foreign currency you can get fixed prices, buy the currency ahead or use your foreign currency account as a holding account to pay those foreign suppliers. That often saves losses in currency exchange (FX) as in, don’t convert money back to sterling only to buy foreign exchange later to purchase inputs. Sounds obvious?
Some suppliers will agree a fix on an exchange rate and effectively ‘hedge’ for you. This will cost, but if it means you have fixed the price and therefore the margins you expected, at least you know where you are.
The other way to ‘hedge’ is to buy forward or at least agree a quantity that you can draw from over an agreed period where the price is fixed. Remember, you will still need to have priced the currency in or be holding it as currency movements will still impact, even if the price is fixed.
Take advice from your bank or talk to a specialist FX trader who can help present the costs and benefits of managing foreign exchange.
Consider your contracts. Have you included any clauses for excessive currency fluctuations that your trading partner might be prepared to accept?
The lesson?
It is often said that when you are offered a fixed rate it is generally when you want to stay variable, and the other way around. I would remind people of the juice company I worked with a decade or two ago. They were doing so well they found they were making more money on the exchange rates than on the orange juice concentrate they were buying with it. They got more and more ambitious until the trend suddenly went the other way and they lost a shed load of money and subsequently the business and their jobs. The lesson? Little and often, and remember you are a food and drink business not a FX trader.