6 ways to manage currency fluctuations in your food and beverage processing business

The daily movement of the Canadian dollar's value compared to the United States dollar's value is widely reported in Canadian business reports. The implications for performance and profitability for Canadian businesses, including food and beverage processors, are less often discussed, yet the fluctuations can add to the cost of business.

On average, 35% of processed food in Canada is exported, so exchange rates can affect revenues and costs.

Exchange rates are the relative value of Canadian currency compared to other currencies. The complex interactions among multiple factors such as trade balance, interest rates, commodity prices, inflation and economic performance combine to determine the value of the Canadian dollar. The Canada-U.S. dollar exchange rate is most important to most Canadian food and beverage processors since more than 75% of food and beverage exports go to the U.S.

The impact of a strong U.S. dollar on Canadian food and beverage processors can happen in a few primary ways:

Input prices: Most North American commodity inputs are priced in U.S. dollars. That means Canadian manufacturers, including food and beverage processors, pay higher prices for raw materials. The financial impact shows reliance on imported raw material inputs. Similarly, other U.S.-sourced inputs in manufacturing, like equipment or packaging, can lead to higher costs.

Export revenue: A weaker Canadian dollar positively impacts export revenues. Canadian exports become more affordable and competitive for foreign buyers, leading to potentially higher demand and sales. Also, when the Canadian dollar is lower, manufacturers earn higher revenue when converting U.S. dollar-dominated sales.

Net benefits: A strong U.S. dollar normally yields net benefits for exporters. The positive effects on revenues typically outweigh the impact of higher input costs.

For example, consider a Canadian food and beverage processor whose imported raw material ingredients represent 20% of the sales price; domestically sourced ingredients are 20%; labour costs add up to 30% and profit and overhead make up the remaining 30%. Suppose the value of the Canadian dollar suddenly falls by five cents relative to the U.S. dollar for every $1 of U.S. export revenue the company earns. In that case, it will realize a $0.05 gain in Canadian dollars. Meanwhile, the imported raw material costs will only increase by $0.01.

However, there can be exceptions when sales are primarily within Canada, and inputs are largely imported. The exchange rates of our key competitors will impact Canadian competitiveness and sales opportunities in a country like the U.S. The relative value of the Chilean peso or the euro vis-à-vis the U.S. dollar can impact sales of Canadian salmon exporters in the U.S., for example, if those other currencies are weaker or devalued more compared to the U.S. dollar than the Canadian dollar.

With so much variability in currency rates creating risks for food and beverage processors, it’s important to have a risk management plan to deal with currency rates and forecasted changes. Here are six key ways to manage the risk:

1. Diversify export markets

Rather than relying heavily on the U.S. market, expand sales to other international markets where the Canadian dollar may be more competitive. This reduces exposure to fluctuations in the U.S.-Canada exchange rate.

2. Localize supply chains

Source more ingredients and materials domestically to reduce exposure to exchange rate changes on imported inputs. This can also improve supply chain resilience.

3. Implement hedging strategies

Use financial tools like forward contracts or currency swaps to lock in exchange rates and manage currency risk. This can help stabilize input costs and revenues. Your bank or accountants can usually direct you to firms that can implement hedging strategies.

4. Focus on value-added products

Shift production towards higher-margin, value-added goods that may be less sensitive to exchange rate fluctuations. Commodities and undifferentiated products are usually more directly impacted by exchange rate changes. This can help offset the impact of a strong U.S. dollar.

5. Refine operational efficiency

Streamline processes, invest in automation and find other ways to reduce costs and improve productivity. This can help maintain profitability despite exchange rate pressures.

6. Manage pricing strategies

Exercise caution when using the advantage of a strong U.S. dollar to discount Canadian equivalent selling prices. Enjoy the potential exchange rate gains as a windfall, but build your budgets around a profitable Canadian selling price.

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