Exchange rates erode profits

Volatile exchange rates are eating away at margins and eroding profits for food manufacturers, while banks take a substantial margin of profit from exchange rate deals, a currency exchange specialist has claimed.

In addition to unfavourable exchange rates, added Charles Purdy, director at Smart Currency Exchange, "during the process of making and/or receiving international payments, the banks can take a substantial margin without the organisation even realising it". He said this could add significant costs, running into hundreds of thousands of pounds, and in some instances nearly 5% could be added to a food company's annual costs.

"Banks profit from providing poor exchange rates and charging various fees. They also fail to assist organisations on the money saving options available to fix exchange rates so that budgets are maintained," Purdy said.

Adrian Sutherland, spokesman for foreign exchange broker World First said that one bakery ingredients manufacturer that imported enzymes from a French company had reported that the high value of the euro had absorbed around 50% of its profits over the space of a year.

"Since the pound's value started to slide, this has become a common theme," Sutherland said. "With the UK economy already in freefall and orders down, the decline in the strength of sterling over the past year against both the euro and US dollar has come at the worst time. The dilemma is whether to continue to buy currency on the spot market and take the prevailing rate with the hope of sterling's recovery, or hedge against any further downside through forward contracts."

But, typically, hedging options are regulated by the Financial Services Authority, he added, and so are usually only offered by banks, most of which tend only to offer options to very large manufacturers.

In contrast, World First offers a range of hedging services to small and medium-sized companies in the food industry, said Sutherland. This includes a new product designed to match the risk of currency purchase to individual circumstances. The strategy is tailored to fit the exposure, currency forecast and risk level of each individual firm, with charges according to the level of risk.