In the 1960’s my father was successfully exporting fruits and vegetables from the United States to countries around the world. The markets he traded were strictly divided into “regular” or consistent markets and “opportunity” or sporadic markets. In other words, he exported to islands in the Caribbean every single week because these countries did not grow much produce and relied on the U.S. as a continuous source supply. These were consistent markets.
He also exported to Europe, but inconsistently. One year he would export nothing, then the bad weather would affect the European apple crop, and he would ship boatloads to Europe. It was strictly an opportunistic market.
What changed all this was when President Nixon rejected the old Bretton Woods system of fixed currency rates and, instead, allowed the dollar to float. As the dollar collapsed, businessmen from Europe began visiting my father asking what they could purchase from the United States. They didn’t even know what they were looking for, but they felt that with the dollar down over 30%, there must be opportunities.
Shortly thereafter, Europe became a regular, consistent market for U.S. exporters with lettuce, apples, grapefruit and more being shipped week after week. Then a funny thing happened. The initial period of regular shipments to Europe, following the initiation of floating currency rates, gave European consumers an opportunity to become familiar with the taste and quality of United States produce. Since that time, whether the dollar is high or low, the French still want Florida Ruby Red grapefruit.
In effect, a currency fluctuation opened the door for the mass sampling of a product, and that, in turn, led to the development of a regular market.
It is this type of unanticipated consequence that needs to be kept in mind as international traders confront the consequences of massively shifting currency rates. For all the talk of how these changes will affect trade flows, it is important to remember that the consumer is the ultimate decision maker, and currency experts are particularly bad judges of how consumers will react to changing prices for individual items.
For business people, the plunge of the Mexican peso or the soaring of the yen and mark against the dollar may serve as prudent reminders that currencies are a tricky part of the business. This is particularly true in dealing with U.S. companies, most of whom expect to be paid in U.S. dollars. The non-U.S. buyer is left with the risk of currency fluctuation and the decision as to whether to hedge currency positions or not.
Hedging can be expensive, and the temptation to not hedge is therefore substantial. Every business, of course, must make its own decision, but it is worth remembering that if you are buying in U.S. dollars and selling in a local currency but are not hedging against currency fluctuations, then you have started a side business as a currency speculator. You might win or you might lose, but such speculation has little to do with the trading of food and agricultural products.
As a matter of public policy, most traders would certainly prefer a stable currency environment. This eliminates the cost of hedging currencies and enables business people to pay attention to their businesses rather than having to pay attention to currency fluctuations.
There are various ways to achieve this type of goal. The gold standard is a long-established system. More recently currency boards, in which countries issue currency only to the extent they have foreign reserves, have attracted much attention. Although some methods are better than others, all methods are inherently unsatisfactory in that all can be changed due to politics. About the best business people can hope for is to urge our governments to adopt policies that minimize the likelihood that the governments will engage in the kind of behavior that leads to sudden revaluations of currencies. This means fighting deficits, inflation and political attempts to micromanage the economy and the currency.
Then again, the existence of difficulties such as currency fluctuations may be what creates opportunities for world traders. After all, if it was easy, everyone would trade throughout the world. The opportunities for profit are vast and it is only the mysteries of currencies, national regulations, credit risks and more that keeps many playing in only their domestic markets.
The bottom line is that despite the dire predictions of many pundits, even collapses in currencies rarely bring an end to international trade. Instead, fluctuations shift opportunities to new realms. Perhaps luxury items, such as raspberries, will be emphasized, or maybe basics, such as dehydrated potato products, will take the forefront.
The fluctuations of currencies just add a little more excitement to the exciting world of trade for the food and ag industries. Here at American Food and Ag Exporter magazine, we are proud to be part of the excitement.