Currency hedging is key to plain sailing

Currency hedging is the key to a plain sailing future Given the international nature of fishing, currency fluctuation is a risk that most fishermen should consider, according to moneycorp’s Lee McDarby

As the UK prepares to leave the EU, Lee McDarby, Director of Corporate FX at moneycorp explains why the fishing community should have a plan around currency exposure.

Brexit is set to change the landscape of the fishing industry. Leaving the single market means fishermen could lose access to their current supply and distribution chains, and will need to organise a whole new set of certification to export wild-caught marine fish to the EU. It’s unsurprising therefore that initial confidence in Brexit’s ability to protect British fishing waters has turned to concerns over border delays and the impact it will have to existing supply chains.

While the conditions in which the UK will leave the EU are still uncertain, what is certain is that UK fishermen will need to become more focused on price sensitivity and risk management to prosper.

Why should the fishing community care about currency exposure?

Fishermen are used to planning around all types of risks, from rough sea conditions and supply chain disruptions – to ever changing customer consumption habits. However, a risk that most fishermen don’t consider but should, given the international nature of fishing, is currency fluctuations.

Regardless of whether you are importing equipment from China or exporting mackerel to Norway, at some point your business will have to make or receive a payment transaction to or from a foreign partner. It is at this point that currency fluctuations become real.

We are in a period of unprecedented fluctuations of the Pound as a result of Britain’s vote to leave the European Union. In the months following the EU referendum the Pound slumped by 15% against both the Euro and the Dollar, and although there have been ups and downs since, Sterling has never fully recovered. In normal times currency fluctuations would have a moderate effect on the industry, but thanks to the extent of the shifts in the Pound, it is having a significant impact on bottom-line.

While a weak Pound may be favourable for any fish exported within Europe - as your product is cheaper for buyers - it is detrimental if you are importing from Europe, or exporting to a country where the Pound is stronger. For example, you may struggle if you were exporting product to Russia where the Ruble is performing poorly in face of the nation’s struggling economy, as your product would be deemed more expensive.

Analysis from the Wageningen University in The Netherlands found, counterintuitively, that should the UK leave the EU, the greater access to its own water (fleet sizes in this case could increase by 10-15%) would actually push the overall price of UK products down due to increased supply - not so good news for fishermen. In this scenario, a weak Pound may be a fisherman’s friend, counterbalancing some of the negative impact of falling fish prices by making its products more attractive to foreign buyers.

Using a currency expert can help keep you afloat

Currency markets are volatile and buying currency on the wrong day can find fishermen spending considerably more than they should be. Many fishing businesses continue to use their high street bank to make overseas transfers, but what they don’t realise is that foreign exchange experts such as moneycorp can offer better rates and help monitor the markets, ensuring they have a better chance of buying foreign currency at the right time.

The principle behind hedging is fairly simple. With a deposit, fishing businesses can set up a “forward contract”, which allows them to lock in a prevailing exchange rate for a period of up to two years regardless of any up or down movements in the wider current market.

For example, if a UK fish processor which is a net importer of fish from Europe secured the pre-referendum GBP/EUR exchange rate of 1.32 (EUR/GBP 0.76) then they could have continued trading at that rate - despite the Pound’s crash in value - for an additional two years.

A more flexible option is a “market order” that allows fishing businesses to specify a target rate, and if that rate is reached the funds are transferred. There are no guarantees with a “market order” but they can pair it with a stop-loss order, specifying the lowest limit they are willing to accept, allowing them to protect profit margin while also having the opportunity to take advantage of movements in the market.

Rough seas lie ahead

With British taste still geared towards “The Big Five”, which are largely imported from overseas and the ever growing competition from other sources of protein, the fishing industry certainly faces challenging times.

The extension of the Brexit deadline and the lack of indication of the final agreement certainly have not helped instil confidence among the fishing community. With the chance of the UK leaving the EU without a deal still looking possible, which would be the worst case scenario for Sterling, fishing businesses which haven’t prepared for this scenario are likely to be putting their margins at risk.

During unsettling times it is important to be the captain of your own destiny; take a proactive approach and make sure your business isn’t left exposed to currency headwinds.

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