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  • 10.2.6-RISK AND THE RELATION TO TRADE CREDIT-CURRENCY RISK

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  • Currency risk

     
     
    The vast bulk of the world trade in coffee is expressed in United States dollars and coffee is known as a 'dollar commodity'. But in many producing countries the local currency is not linked to the United States dollar. Exporters therefore face the risk that the dollar exchange rate will move adversely in relation to their own local currency, affecting both export revenues and internal coffee prices.

    Usually, the currency risk can be limited by borrowing in the currency of sale, provided local regulations permit such foreign currency advances to be offset against the export proceeds. If advances are immediately converted into local currency that in turn is immediately used to pay for spot goods whose shipment will be invoiced in United States dollars, then the cost of goods is expressed in dollars and not local currency. If the cost of goods represents say 80% of the sales value then one can say that exposure to currency risk is limited. But in many countries local banks are unable to make substantial advances in United States dollars.

    Historical evidence suggests that in most coffee producing countries the local currency is more likely to depreciate (exporters ought to profit on stocks bought in local currency) than appreciate (exporters are likely to lose because they will receive less local currency on export). But there have also been numerous examples where local currency movements have gone against exporters, for example due to intervention by local monetary authorities. Individual companies and bankers approach currency risk in different ways, but the guiding principle should always be that commodity export and currency speculation do not go together.

    Exposure to potential currency risk therefore needs to be reported and monitored in exactly the same way as purely coffee trade related risk. In many coffee producing countries currency risk can be hedged, but the complexity of currency markets and trading places this subject beyond the scope of this website.