COVID-19 triggers shift in agribusiness foreign exchange behaviours

Grain Central, June 4, 2020

COVID-19 induced uncertainty has led to the emergence of interesting trends in foreign exchange hedging activity by agribusinesses, as they respond to an Australian Dollar (AUD) which in recent months fell to 15 per cent lower than January 2020 levels, at near United States Dollar (USD) 0.60 cents.

The AUD traded at a 17-year low in March, triggering a shift in behaviour for many agribusinesses looking to take advantage of favourable exchange rates to market their grain, beef, wool, fresh produce, cotton and sugar.

NAB Agribusiness customer executive, Khan Horne, said the lower AUD/USD situation had brought exporters out of the woodwork as they looked to hedge increased volumes, but many were mindful of the impacts COVID-19 was having on their end markets.

Khan Horne

“We’re seeing high levels of activity among many agricultural exporters who are looking at currency hedging as means to maximise returns for their product,” Mr Horne said.

“While the exchange rate makes overall hedging very appealing, the difficulty lies in the fact that supplier cash flow and market demand uncertainty has increased in a post COVID-19 environment.

“For example, a cotton producer might have sold USD $1 million worth of cotton to the same customer each year for the last 10 years, with this certainty allowing them to run an annual cash flow forecast on USD earnings with a large degree of accuracy.

“Today, COVID-19 disruptions to supply chains, factories, ports, labour and customer demand mean end buyers are unsure about how much product they can take on, and this has led to agribusinesses having to be a bit more flexible in their hedging activity.”

Flexible options

Beyond selling in the spot market and hedging via forward exchange contracts, agribusiness customers are also considering foreign exchange options which provide more flexibility when it comes to delivery volumes and rates.

“These foreign exchange options are appealing in the COVID-19 context, but customers should be mindful of premiums associated with entering these trades,” Mr Horne said.

NAB Agribusiness associate director of corporate risk management, Arthur Tobin, said COVID-19 impacts had led to agribusiness customers reviewing existing hedging behaviour and current hedge books, as they looked to build in flexibility and gain greater certainty on their balance sheets where possible.

“Our major trading partners, China, the United States and Europe, are all at different stages in the COVID-19 recovery cycle. Reports indicate China is re-opening, while Europe and arguably the United States are still working through the cycle,” Mr Tobin said.

“While the recovery in some markets may still be months away, many agribusiness customers are looking at hedging USD exposure at historically attractive levels to provide greater AUD cashflow certainty.

“In March this year, we saw the AUD trade with more volatility in one month than it did throughout the whole 2019 calendar year.

“This degree of volatility means what might be a profitable contract one day is unprofitable the next, and customers are now having to make hedge decision faster than they might have in the past.”

Inherent risk

At a broad level, Mr Horne said the robust understanding of risk inherent to most agribusinesses had positioned them well in the COVID-19 environment.

“Our customers deal with multiple risks and scenarios in their businesses all the time, whether that’s commodity price risk, seasonal risk, regulatory risk or interest rate risk,” Mr Horne said.

“Foreign exchange is really just another factor to be managed in their balance sheets, and they have an inherently sophisticated understanding of markets, hedging and what the associated risks and benefits mean for their businesses.”

Source: NAB




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