Podcast
Forex Management in Agriculture - Navigating Risks and Opportunities
In this episode, Sharon Constançon delves into the complexities of Forex management in the South African agricultural sector. She highlights the logistical challenges, market volatility, and weather-related risks that impact farmers and exporters. Sharon explains how hedging strategies, risk management, and independent advisory services can help mitigate financial uncertainty for agricultural businesses.
The discussion also explores how transport inefficiencies, currency fluctuations, and unexpected global events (Black Swan events) influence farmers’ revenues and profitability. Sharon shares insights on how farmers can make informed Forex decisions, the role of independent advisors, and why strategic Forex management is crucial for long-term sustainability.
Tune in to learn how Forex management can be a game-changer for the agricultural industry, helping businesses navigate uncertainty and secure better financial outcomes.
Transcript
TM: Welcome back, everyone, to another episode on Forex. Last week, we had the pleasure of speaking with Sharon Constançon about navigating the South African corporate Forex landscape.
Today, we are focusing on Forex management, specifically within the South African agricultural sector. Sharon, last week, you mentioned that the agricultural sector presents unique complexities compared to other industries. Could you elaborate on that?
Today, we are focusing on Forex management, specifically within the South African agricultural sector. Sharon, last week, you mentioned that the agricultural sector presents unique complexities compared to other industries. Could you elaborate on that?
SC: Thank you, Thabiso. I appreciate the opportunity to share knowledge, and it’s always great to engage in these discussions with you.
The agricultural sector isn’t necessarily the most complex, as all industries have their unique challenges. However, agriculture does face distinct issues, particularly due to the perishability of its products. The cost of transport to northern markets is significant, and air freight is often impractical due to costs. Instead, produce is shipped in refrigerated containers or for bulk goods like wheat in large cargo holds.
One of the primary challenges is getting the product from the farm to the port. South Africa’s deteriorating road and rail infrastructure adds delays before the product even reaches the harbour. Once at the port, congestion, a lack of skilled labour, excessive paperwork, and inefficiencies frequently cause further setbacks. Unfortunately, perishable goods often remain on the docks longer than they should, putting them at risk.
The next challenge is the extended shipping time. Given that vessels now avoid shortcuts like the Suez Canal and instead travel around the Horn of Africa, transit times are longer, and rough seas further jeopardise the quality of the goods. Once in their destination markets, products go through further distribution processes before reaching consumers.
Beyond logistics, farmers also contend with unpredictable weather conditions. Hail, floods, storms, and pest infestations significantly impact yield. There’s very little farmers can do when a sudden storm wipes out a crop, and these external threats are cyclical in nature. Additionally, labour shortages and business operational costs add further strain.
I recently visited a packing plant and observed how efficiently the process moved from packing to refrigeration to [ready for departure for] shipping in just 15 minutes.
Unfortunately, this efficiency is often lost once the product leaves the farm.
TM: It sounds like the list of challenges goes on. Could you expand on how these factors impact the agricultural sector?
SC: Farmers are at the base of the agricultural supply chain—they do the most work, take on the greatest risk, and often receive the lowest financial returns. Ensuring they get a fair price is crucial because if farmers stop farming, the consequences would be dire.
Many global factors affect their livelihoods, including logistical inefficiencies, geopolitical tensions, market disruptions, and even pandemics. One of my clients budgeted to sell 100 units of produce in a year, yet due to these challenges, they only managed to sell 20. Although some years bring higher-than-expected yields, in recent years—especially since the pandemic—the sector has suffered significantly at the farmer level.
TM: That’s quite an eye-opener. Transport is a known issue in the mining sector. How does it compare with agriculture?
SC: A recent trip from Durban to northern KwaZulu-Natal highlighted this issue for me. I noticed an extensive queue of stationary coal trucks—16 kilometres long—waiting to offload at a coal terminal. This inefficiency affects costs and pricing, with intermediaries often reaping financial benefits while producers bear the burden.
Similarly, agricultural supply chains face numerous obstacles. Many farmers are now shifting towards more sustainable, shelf-stable products such as nuts, which are easier to store and transport. Wine, for example, is one agricultural product that has successfully positioned itself in global markets due to its longer shelf life.
TM: Forex has been around for many years. Are farmers aware of its complexities?
SC: Farmers are generally cautious about Forex. Some choose to deal at spot rates, while others prefer full hedging to secure a fixed price before supplying their product. Larger cooperatives and exporters tend to take a more structured approach, considering factors like interest rates, discounts, and market volatility.
Hedging can be beneficial when interest rates rise, offering better forward rates than spot prices. However, if market conditions change unexpectedly, farmers may face losses, making risk management crucial.
TM: How do unexpected events, or Black Swans, impact Forex management for farmers?
SC: Unexpected events can be devastating. If a company budgets for 100 units but only sells 50 due to unforeseen circumstances, it may face financial losses due to unfavourable exchange rates.
A farmer who hedges 40% of their expected yield might be forced to sell their hedge at a loss if bad weather destroys their crop.
If they have diversified operations, they may offset losses by reallocating the hedge to another product.
Otherwise, they could be forced into taking a realised cash loss, further straining their finances.
TM: Is Forex management readily available for farmers?
SC: Yes, many farmers and cooperatives work with independent Forex advisors. Given the high risks in agriculture and mining, it’s crucial to use independent experts who aren’t motivated by transaction commissions. Farmers should seek advisors who prioritise their long-term financial health rather than short-term profits.
I’ve encountered cases where brokers took advantage of market volatility by inflating margins excessively. This is why having an independent intermediary ensures farmers receive fair pricing. The goal should always be sustainability and trust.
TM: That makes a lot of sense. If someone in the agricultural market wants Forex advisory, can they approach you?
SC: Absolutely. CC Currencies offers advisory services in South Africa. I originally ran this business under Constançon Currencies and Treasury Outsourcing since the 1980s.
We focus on independent, strategic Forex advisory. Farmers or businesses interested in our services can reach out via CC Currencies or find me on LinkedIn.
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