The South African agricultural sector is rapidly growing and reached a high level of agricultural exports of around R266.3 billion in the previous year.
Recent agricultural reports show that this includes exposure to foreign exchange (FX) movements and shows major contributions to the trade surplus of about R124.7 billion.
Aligning FX strategy with the farming production calendar
Bianca Botes, managing director of Citadel Global and FX and currency expert, highlighted FX risks in agriculture and how to analyse and understand currency movements rather than the days on which the transaction occurs.
“FX risk in agriculture is not simply about the rate on the day a transaction takes place. It is about understanding how currency movements interact with the production calendar, procurement cycle, harvest and timing of cash flows,” she said.
Botes explained the difference between export crops and the confirmed fertiliser order and highlighted the influence of cash flow. This includes experts strategies to help farmers and how they can structure or tackle currency risks.
“A confirmed fertiliser order is very different from an estimated export crop that has not yet been harvested or graded. The certainty around that cash flow should influence how much is hedged and which instrument is appropriate. Our team of experts has experience in assessing these exposures and structuring an approach around the farmer’s timing, risk appetite and business objectives,” she said.
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She also mentioned the strategy they use to approach currency risks by combining transactions, exchange contracts, and ensuring balance, certainty, flexibility and participation.
This includes the approach of not only focusing on the whole exposure at the same time but managing the risk that occurs in production, sales and other procurements.
Botes also added that their goal is to analyse and understand currency risk in businesses and find ways to protect cash flow in a good way, and not to predict the rand strength during the process.
However, Botes explained the process of matching cash flows rather than converting the currency and what farmers should know and understand in ensuring proper management of cash flows.
Matching cash flows and CFC accounts to protect profit margins
“If a producer receives euros from export sales but also has euro-denominated input costs, there may be an opportunity to match those flows more deliberately rather than converting currency unnecessarily.
“This is where inter-company foreign currency (CFC) account hedging can add real value. By assessing the timing, currency and certainty of each cash flow, we can help structure how currencies are retained, crossed or hedged within CFC accounts, while still applying the right instruments where a natural offset is not enough,’’ she said.
She explained the budget rate as the rate at which the season was planned, and the process of how the markets operate along with the budget rate.
“The budget rate is the rate against which the season was planned. If the market moves favourably relative to that rate, it may make sense to increase certainty on known or highly probable exposures. The objective is risk management, not trying to pick the top or bottom of the currency market,” she said.
Botes mentioned the importance of having an FX policy and how it assists farmers in managing and structuring the risks of currency and cash flows.
“Currency volatility cannot be removed from farming. But it can be managed in a more structured way, giving commercial farmers greater certainty around input costs, export receipts and ultimately the margins on which their businesses depend,’’ she said.
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