Author: David Stritch, Senior FX Analyst, Caxton
Over the past year, the food and drink industry has wrestled with significant currency fluctuations driven by political and economic events. With a tariff-friendly US administration potentially now starting trade wars, this volatility is likely to persist. For sectors like food and drink which are heavily reliant on international supply chains, hedging against currency volatility is crucial for effective business planning.
But where to begin?
The impact of tariffs on the food and drink sector
Following previous, in 2017 for example, when the EU targeted US alcohol imports in its retaliatory tariffs, the EU Commission identified industries particularly vulnerable to tariffs and trade wars. Food, the Commission concluded, was the most exposed industry, especially poultry, fruit, vegetables, and alcohol.
Any upcoming UK tariffs levied on these products will likely be in lockstep with the US and so this is something the sector should monitor closely.
Trade tensions between the US and EU present both challenges and opportunities for UK food producers. Unlike the Eurozone, which had a $107 billion trade surplus with the US in 2023, the UK runs a trade deficit, importing more from the US than it exports. This disparity offers hope that the UK might avoid the brunt of US tariffs, potentially providing a competitive advantage over the European producers facing higher prices.
Currency volatility and its implications
Trade tensions have significantly impacted currency markets. The Deutsche Bank FX Volatility Index reached a 2023 high in late December and has remained elevated ever since. For food producers, this translates to dual risks, i.e. the immediate effects of tariffs and the knock-on impact of increased currency fluctuations cutting into profit margins.
In the UK, December 2024 livestock prices were 6.9% higher year-on-year, with the potential for further increases depending on tariff changes. Since the start of the year, GBP/USD has strengthened by 4.5%, while GBP/EUR has weakened by 2% – important considerations when pricing.
Historically, alcohol has been one of the hardest-hit industries in trade conflicts but potential retaliatory tariffs will affect a broad range of food and drink products. Recent news reports that a threatened 200% tariff on European wines could significantly impact global supply chains, influencing FX volatility even further.
Managing Currency Risk
Food and drink manufacturers are adopting various strategies to manage the impact of currency volatility. Many of the businesses I work with benefit from services such as real-time rate tracking, automated payments, and multi-currency accounts to help better manage FX volatility and keep costs stable.
Adjusting payment timing is also a good tactic i.e. delaying or accelerating transactions based on favourable currency movements. Many industry players consult FX experts who can help track interest rate expectations, inflation, and global economic trends to help businesses develop tailored risk management strategies.
The food and drink industry faces a challenging landscape as we head into Q2. By implementing robust risk management strategies however, and staying informed about global economic developments, businesses in the sector can not only mitigate potential losses but also position themselves to capitalise on favourable currency moves.
Proactive planning and strategic hedging are key to maintaining stable costs and ensuring predictable financial outcomes in these uncertain times.
