Dont just accept the risks of exchange rate volatility 9 July by monkey6

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									PRESS RELEASE

Don’t just accept the risks of exchange rate volatility 9 July 2009 “When your produce is being loaded onto the ship you should already know what your minimum price will be,” says Marthinus Look, Senior Manager, Agribusiness Support at Standard Bank. He adds, “In the time that it takes for your product to arrive on the overseas market, there should be no surprises in terms of price if the Rand strengthens.” South Africa, as a net exporter of agricultural products, has many industries that depend on export markets for their survival. With the worldwide financial crisis, exchange-rate volatility has reached unprecedented levels raising concerns and questions about the protection of profitable income realisation. “With diligent, proper financial management farmers can weather this storm by making use of the tools available to minimise inherent risks and costs,” says Loock. The citrus industry is an example of a sector affected by the influence of exchange rates on income flows. More than 60% of citrus is exported to Europe, the Middle East and UK during a window period of May to October. During the 2008 season the ZAR/USD exchange rate volatility calculated was 11% while the ZAR/euro was 5%. This implies that the price realised at producer level could move by an average of 11% or 5% for the dollar- and euro-denominated markets respectively. Exchange rate volatility May-October 2008

13.00 12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00

12.53 11.37

8.26 7.22

R/$

R/Euro

If the rand appreciates against the dollar as South Africa is currently experiencing, it is likely to translate into an unnecessary loss for many exporters. Loock says that it is important that producers understand the hedging strategy of their export company and that they manage this risk appropriately. “Many farmers are not even aware that they themselves and not their export company bare the exchange rate risk right until the end.” By making use of currency futures producers are able to hedge against negative movements and offset the effects of volatility. A currency future is a derivative contract that trades on the JSE’s interest rate and currency derivative platform, Yield-X. Currency futures are agreements between two counter parties where one counter party buys (longs) the underlying exchange rate and the other sells (shorts) the underlying exchange rate on a specified future date. “The contract thereby allows participants to lock in an exchange rate today for some time in the future,” says Loock. A short currency future holder will benefit from a decrease in the underlying exchange rate or an appreciation of the rand, vice versa for long holders. This instrument allows you to hedge against currency risk efficiently and transparently, and can be used as an investment tool to diversify into international markets or take advantage of any currency volatility. Loock points out, “This instrument is not used to make profit – it is used to sustain the floor price at which you decided to sell the fruit. The loss you will make in terms of income generation due to the Rand’s appreciation will be offset by the positive cash flow from the hedge.” The opportunity cost of not taking this ‘cover’ may be too high. Based on average production costs, this additional trading cost is negligible compared to the expenses already incurred per hectare. Given that the price realised at producer level in 2008 could have moved by an average of 11% or 5% for the dollar- and euro-denominated markets respectively, hedging against exchange rate volatility is a small price to pay. Standard Bank Global Foreign Exchange is able to provide hedgers and investors with innovative solutions to manage their foreign currency exposures with currency futures being one of the tools that can be used for this purpose. For further information email forex@standardbank.co.za. Or phone 08000 FOREX

ENDS

For more information, kindly contact: Standard Bank South Africa Thekiso Rakolojane Communications Manager Work Tel: +27 (0) 11 636-2502; Thekiso.rakolojane@standardbank.co.za Magna Carta Public Relations Thabi Mokoena Work Tel: +27 (0) 11 784 2598, thabi@magna-carta.co.za


								
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