Currency instability will affect industry results

By Liam O'Neill

05 April 08 : The recent sharp increase in the value of the euro against both the Dollar and Sterling will impact on our beef, dairy and other agri-based exports with exporters losing competitiveness as the euro increases in international value.

When Irish companies begin to renew their international contracts they will find themselves at a disadvantage with their British and American rivals, and already, some of our leading Irish agri companies, have warned about the implications which this new trading environment will have on their results.

Figure 1 shows the euro against sterling. At 31 March 2007, the euro sterling exchange rate was €0.68 but a year later - last Monday, 31 March the exchange rate was £0.79, representing a 16% increase.

Over the trading year to 31 March 2007, the euro/sterling exchange rate ranged from £0.66 to £0.70. For the previous five years, the exchange rate ranged from £0.65 to £0.70. This provided a relatively stable platform for our exports to Britain.

However, since last October, the exchange rate has soared from £0.70 to £0.79 adding to our exporters' competitiveness problems.

Similarly, the euro increased in value by 19% against the US Dollar in the year ending March 31 2007, as shown in Figure 2.

For the current year ended 31 March 2008, the value of the Euro ranged from a low of $1.33 to a high of $1.58.

However, since last October alone, the euro has increased by 11% against the dollar.

The principle reason for the increase in the value of the euro against both currencies is the banking sub prime crisis and the following credit crunch.

Britain accounts for over 40% of our food and drinks exports and the increase in the euro against sterling adversely affects our exports there and additionally puts pressure on Irish companies competing on the home market against imports from Britain. The strong euro to dollar does benefit our economy when it comes to purchasing oil where the price is now over $100 a barrel.

Looking at our international food companies, Greencore, at its AGM, noted that profits for the year could be hit by the strength of the euro against sterling. This will also impact on Kerry Group and Origin as they have significant operations in Britain and will depress their financial results on conversion back to Euro.

Kerry, IAWS, Irish Dairy Board and Glanbia have significant trading activity in the US which will also be affected by the strengthening euro. However, currency fluctuations are nothing new for Irish agri companies. They factor in currency fluctuations into their trading equation and many of them would have foreign currency contracts in place to reduce their exposure to currency highs and lows.

However, when contracts expire, they will be renewed at less favourable rates.