Canada?s volatile dollar is adding yet another challenge to the already embattled B.C. manufacturing and export sector.
Once every three days during the past two years, the value of the loonie fluctuated more than half a cent compared with the U.S. dollar. That daily level of unprecedented volatility has made it difficult for exporters to set appropriate prices for their goods and services, the bulk of which remain sold in U.S. dollars.
According to Jayson Meyers, president and CEO of the Canadian Manufacturers and Exporters Association, ?It can easily make the difference between profit and loss in a matter of days as the dollar jumps up and down.?
But if the divergent currency forecasts of Canada?s big-five banks are any indication, that volatility is not about to subside any time soon. While each bank?s report said the buying power of the loonie will likely decline starting in 2012?s second half, there remains nearly a $0.10 difference in where the dollar is projected to be in a year?s time.
John Anderson is president of Vancouver?s Oppenheimer Group, which globally sources fresh produce for the North American market.
He said the loonie?s volatility has been ?off the scale,? which makes it extremely difficult to expand even a business that has managed to retain stable demand despite global economic uncertainty.
?I?ve been in this business for 37 years, and in the last two to three years, the volatility has been incredible,? said Anderson. ?We?ve grown our business over that period of time, but at the same rate as the exchange has fallen, so we?ve been fortunate. But you can?t continue to do that.?
In recent years, the company has found new ways to reduce costs (which are priced in Canadian dollars) while increasing sales with growers and expanding to new markets in Asia to remain profitable.
Some of the company?s key cost-saving initiatives have included:
?implementing a new software program developed in-house to increase efficiency in its global logistics network, which includes more than 5,000 growers in 25 different countries; and
?upgrading thousands of its trucks in the U.S. to lower fuel consumption and reduce air pollution as part of being certified under the Environmental Protection Agency?s SmartWay program.
The company has also strengthened its relationship with its growers by selling products not only into the North American market, but also into Asia and elsewhere.
?We?re offering a better service and diversifying our markets to the grower by saying, ?We?ll take the product for Canada and the U.S., but we?ll also take it for Russia or England or the Far East.??
However, the Oppenheimer Group?s initiatives haven?t been able to head off currency volatility price increases for some of the produce it sells.
Anderson said the company and produce growers can?t escape the U.S. greenback?s strong swings because produce is still traded in U.S. dollars, regardless of where the products are bought and sold. For Canadian growers, that has generally eroded revenue generated from their goods. For consumers that lower revenue for producers has made goods more expensive.
Medium and large-sized companies have mitigated their exposure to the loonie?s value fluctuations by using derivatives or hedging contracts to buy or sell a currency at a set price for a specified time in the future.
But Myers said those options can be expensive for small- to medium-sized exporters and manufacturers.
Even if a company didn?t have to pay hedging-contract commissions, it faces bigger exchange rate spreads based on its volume and frequency of buying and selling currency.
Hedging costs are not an issue for Burnaby?s Ten Peaks Coffee Company Inc. (TSX:TPK), which sells decaffeinated green coffee to specialty coffee roaster-retailers in North America, but the company?s hedging program has remained an important part of its financial stability for years.
Sherry Tryssenaar, Ten Peak?s CFO, said its currency hedges have been instrumental in mitigating the daily U.S. dollar fluctuations by helping provide it with a relatively stable forecast of its cash flows up to two years in advance.
?Because we have good relationships with our customers and revenue is relatively predictable, we have a good idea what our U.S. revenues are going to be,? said Tryssenaar. ?On that basis, we set our U.S. dollar hedges and make adjustments if necessary.?
As part of its hedging program and to further limit its exposure to volatility, the company also spreads out the number of hedging contracts that mature throughout a given month.
That stability might not be reflected in its public income statements, but that?s not because of instability in the company?s financial position.
?We?re a public company, so one could argue that we should manage our earnings. But we think it?s much more important to manage our cash flows and to explain the volatility in our earnings,? said Tryssenaar. ?Income is driven by accounting rules and regulations, which everyone has to follow. But cash is king.? ?
