Ben Santos, Currency Management Specialist at Kantox, sat down with us to discuss Currency Management Automation solutions for firms in the meat industry. The conversation revolved around the topics presented in our latest report, "Complexity 'Meats' Automation":

• Business models and the risk map

• A heavy administrative burden

• Currency Management Automation solutions

• Embracing currencies

Here's a brief overview of the discussion.

Business models and the risk map

Currency management in the meat industry is a simple yet complex undertaking. Simple, because most (although not all) businesses face dynamic prices. As such, companies should implement micro-hedging programs for firm commitments that protect profit margins in every transaction. But the industry can also be said to be complex because of the variety of delivery and settlement procedures and the heavy administrative burden involved. From the currency risk viewpoint, Ben singles out two main types of risk. On the one hand, we have pricing risk, which is created by the time lapse between the moment a transaction is priced and the moment it is agreed, as the exchange will have shifted in between. On the other hand, there is the typical transaction FX risk that stems from the time lapse between the moment the transaction is agreed upon and the moment it's settled in cash in a foreign currency. Both risks need to be well managed.

Four main challenges: can they be tackled simultaneously?

Firms in the meat industry not only have to deal with thousands of transactions per year in different currency pairs but also with a host of manual procedures to handle the corresponding workflow. The way Ben sees it, they need solutions to tackle four types of problems:

1. Improve pricing
2. Remove currency risk
3. Improve traceability
4. Ease the administrative burden

Can all of these problems be tackled at the same time? "Yes", says Ben as he outlines one by one the solutions available to risk managers.

Improving pricing

Regarding pricing, Currency Management Automation allows commercial teams to establish API connectivity to receive FX rates in real-time and in the desired tenor, applying markups by client segment and currency pair without manual processes.

Remove fx risk

Transaction currency risk can be tackled with micro-hedging programs for firm commitments, a core element of currency hedging in the meat industry. They are exceptionally precise, and they allow companies to aggregate their exposure to the desired degree, currency pair by currency pair, market segment by market segment. But let's not forget that other players sell at fixed prices to big retailers, and they need other currency hedging solutions, such as combined programs to protect their FX budget rate, campaign after campaign.

Traceability

Traceability is the ability to trace every single piece of exposure in its journey, from a single piece of exposure all the way to the corresponding payments. With Currency Management Automation, every single entry has a unique reference. You can drill down to the smallest piece of exposure to obtain the required data granularity. Actual trades can be traced back to the underlying exposure, a huge advantage for treasurers who need tools to adjust their hedging position to the settlement of the underlying commercial exposure when a shipment is delayed.  

Ease the administrative burden

When it comes to the administrative tasks performed by members of the finance team, they can be easily automated. They include, among others, the process of sourcing the relevant FX rate for pricing, the execution of swap transactions, and many others. These tasks can be automated to reduce operational costs and eliminate the risk of human error.

Embracing currencies: The ultimate goal

Having reviewed a whole set of topics regarding FX risk management in the meat industry, Ben discussed the last key issue: the possibility of 'embracing currencies'. It's all about the margin-enhancing benefits of selling in the currency of your customers and buying in the currency of your suppliers.Selling in the currency of your customers allows you to improve your competitive position as your customers can remove the FX markups they charge whenever they are saddled with the task of managing the currency risk themselves. By relieving them of that burden, you can build better long-lasting relationships and, over time, you may capture some of those markups yourself. And, in unsettled times, selling directly in the currency of your customers may even have positive implications in terms of credit risk.In a scenario of a sharp devaluation of an Emerging Markets currency, while you insist on only selling in that market in a handful of currencies like USD, EUR or GBP, some of your clients may be inclined to wait for a better exchange rate before settling their bills. You don't want to be in that position! By taking 'ownership' of the underlying FX risk yourself —and for that, quite obviously, you need to have a robust hedging program or combination of programs in place—you avoid a situation where your client's FX risk becomes your own credit risk. Ben concludes: "We can tackle most if not all of the main FX-related challenges of firms in the meat industry, allowing them to take advantage of the benefits of embracing currencies confidently".

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