Daily fluctuations in the value of the Canadian dollar against the U.S. dollar are widely reported in Canadian business reports. Less discussed is their impact on the performance and profitability of Canadian companies, including food and beverage processors, but the fluctuations can increase business costs.
Canada exports an average of 35% of its processed food products, so exchange rates can affect revenues and costs.
The exchange rate is the relative value of the Canadian currency compared to other currencies. A complex interplay of multiple factors, including trade balance, interest rates, commodity prices, inflation, and economic performance, combine to determine the value of the Canadian dollar. With over 75% of food and beverage exports going to the United States, the Canadian dollar to US dollar exchange rate is of utmost importance to most Canadian food and beverage processors.
The primary impact of a stronger US dollar on Canadian food and beverage processors will be felt through:
Input Prices: Most raw materials in North America are priced in US dollars, meaning Canadian manufacturers, including food and beverage processors, will pay higher prices for their raw materials. The financial impacts reflect a reliance on imported raw materials. Similarly, other U.S.-sourced inputs in manufacturing, such as equipment and packaging materials, may also lead to higher costs.
Export Revenues: A weaker Canadian dollar has a positive impact on export revenues. Canadian exports become more affordable and competitive with international buyers, potentially leading to increased demand and sales. A weaker Canadian dollar also allows manufacturers to convert their USD-based sales into USD, resulting in higher revenues.
Net Benefits: A stronger US dollar typically provides a net benefit to exporters. The positive effect on revenues typically outweighs the impact of higher input costs.
For example, consider a Canadian food and beverage processing company. Imported ingredients account for 20% of the company's selling price, locally sourced ingredients account for 20%, labor costs total 30%, and profit and overhead account for the remaining 30%. For every dollar of U.S. export revenue that the company receives, the value of the Canadian dollar suddenly falls by 5 cents against the U.S. dollar. In this case, the company realizes a profit of $0.05 in Canadian dollars, while its imported ingredient costs only increase by $0.01.
Fluctuations in exchange rates pose risks for food and beverage processors, so it is important to have a risk management plan in place.
However, there may be exceptions where sales are primarily within Canada and the majority of raw materials are imported.Exchange rates of major competitors affect Canada's competitive position and sales opportunities in countries such as the U.S. For example, if the relative value of the Chilean peso or the euro against the U.S. dollar is weaker or devalued than the Canadian dollar against the U.S. dollar, this could affect Canadian salmon exporters' sales in the U.S.
Because large fluctuations in exchange rates pose risks to food and beverage processors, it is important to have a risk management plan in place to deal with exchange rates and anticipated changes. The six main ways to manage risk are:
1. Diversification of export markets
Instead of relying heavily on the U.S. market, we will expand our sales to other international markets where the Canadian dollar is more competitive, which will help us reduce the impact of fluctuations in the U.S.-Canada exchange rate.
2. Localizing the supply chain
Sourcing more raw materials and supplies domestically reduces the impact of exchange rate fluctuations on imported goods. This also makes supply chains more resilient.
3. Implement a hedging strategy
Manage your currency risk by using financial tools such as forward contracts and currency swaps to lock in exchange rates, which can help stabilize your input costs and revenues. Usually, your bank or accountant can introduce you to a company that can implement a hedging strategy.
4. Focus on high-value-added products
Shift production to higher margin, higher value-added products that are less sensitive to exchange rate fluctuations. Commodities and undifferentiated products are typically more directly affected by changes in exchange rates. This can help offset the impact of a stronger US dollar.
5. Improved operational efficiency
Streamline processes, invest in automation, and find other ways to reduce costs and improve productivity – helping you stay profitable despite exchange rate pressures.
6. Manage your pricing strategy
Be careful when taking advantage of the strong US Dollar to discount your Canadian equivalent selling price. Build your budget around a profitable Canadian selling price while still enjoying the exchange rate windfall.
Expanding sales into the United States can be part of a good growth plan for food and beverage processing companies. Managing the risks associated with current exchange rate fluctuations can help you stay on your path to success while protecting your bottom line.
Article Author: Alan Archibald
