Coronavirus spreads currency wins for busy ag exporters

As the dollar plunged to a 17-year low around US57 cents (and briefly below US56c) in the second half of March, foreign exchange hedging activity went into overdrive.

Exporters rushed to lock in commodity sales and currency rates at unusually attractive levels, bolstering their sales margins.

National Australia Bank handled three times as much currency hedging volume in March this year when compared with March 2019.

NAB agribusiness customer executive Khan Horne said the lower Australian-US dollar environment "brought exporters out of the woodwork" as they looked to hedge greater volumes.

Activity was also partly motivated by the need to protect themselves from the disrupting impact COVID-19 was having on export buyers and supply chains.

"We've seen high levels of activity among many agricultural exporters looking at currency hedging to maximise returns for their product," he said.

Much of that hedging activity also ensured the rush of sales deals made while the dollar was low were not subsequently eroded by a rapid lift in the Australian-US exchange rate.

General manager with east coast exporter Robinson Grain Trading, Adam Robinson, said the $A dive triggered a flurry of opportunities for his company as consignments of wheat, barley and pulses "suddenly became quite competitive".

"We've been able to get quite a bit of export business done with existing customers and new buyers," he said.

However, despite opportunities to hedge currency at attractive rates for up to 12 or 18 months, the Sydney, Dubbo and Toowoomba-based trader had not tried playing the currency market.

Business was was busy enough locking in hedging arrangements covering exposure for its extra grain sales.

"In hindsight, it may have worked out pretty well if we had bought a bit more currency," Mr Robinson said.

By April the hedging action was also shifting to fuel, with big farm sector users locking in cheap purchase contracts for up to three years as global oil markets were flooded with too much production and coronavirus lockdowns sent diesel prices to 20-year lows.

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Although the Australian dollar has since made a remarkable rebound, matching January's levels of US68 cents this week, NAB's agribusiness corporate risk management associate director Arthur Tobin said its ascendancy was largely fuelled by current Chinese iron ore demand and recovering oil and gas markets.

While the short term environment looked fairly safe, prompting NAB to tip our dollar holding around US67.5c by year's end (and US72c by December 2021), currency volatility could easily return.

"There are still a lot of questions about the overall picture, and you have to ask if we are really comfortable with the dollar already back to pre-COVID levels in the current climate," he said.

Commonwealth Bank of Australia analysts agreed.

Commodity currencies such as the Aussie dollar had brighter prospects because near-term indicators relating to China's iron ore demand were up and activity was returning to the global economy, yet "increasingly fraught" US-China relations and tensions between China and Australia were "an intermittent downside risk" CBA said.

The underlying message to agribusiness, particularly exporters, has been stay vigilant as currency volatility may again provide sudden low-dollar hedging choices.

"Fortunately agricultural franchises are accustomed to dealing with many risks in their line of work - risky seasons and commodity markets, interest rates and the exchange rate," Mr Tobin said.

"They can anticipate opportunities fairly well and know what to do if our currency does fall, and most have appropriate banking facilities set up so they can jump."

At the same time, NAB's Mr Horne noted agriculture was also exporting strongly, despite the unusual trade conditions and the financial and health concerns created by coronavirus.

"It may not still be down at US56c, but if our dollar is below US70c, or at least around the mid US60s, it's a good rate for exporters," he said.

Yet, while export and exchange rate hedging opportunities had been "very appealing", supplier cash flow and demand uncertainty were more problematic now.

"COVID-19 disruptions to factories, ports, labour and customer demand mean end buyers are unsure about how much product they can take," Mr Horne said.

As export cash flows became harder to predict, agribusinesses also required more hedging flexibility.

Beyond selling in the spot market or hedging via forward exchange contracts, he said many customers took up put and call options, giving themselves more choices on currency delivery volumes and rates.

"From a trend perspective, we've seen a lot of export product protected with foreign exchange options," Mr Tobin confirmed.

"There are cost premiums associated with entering these trades, but they provide a reasonable safety net."

Coronavirus was pushing agribusinesses to lock in greater certainty in their balance sheets, if possible.

While Mr Tobin warned a steady recovery in some markets may still be months away, or longer, volatility could also be viewed as a friend if exporters were ready for it - "so long as it's not extreme volatility".

Mr Horne said average farmers were unlikely to expose themselves directly to FX markets, but years of market deregulation and farm sector export deals had left all agricultural players interested in what currency trends meant to them.