Exchange rate fluctuations and commodities:  understand their importance

Exchange rate fluctuations represent fluctuations in the value of one currency in relation to another. They are defined mainly by supply and demand in the financial market and influenced by factors such as monetary policy, trade flows, international interest rates and risk perception. This movement has a direct impact on commodity prices, which are generally quoted in US dollars, influencing the competitiveness and profitability of the entire global chain. 

For agents in the commodities chain, this exchange rate volatility is one of the main risk factors, as it affects both export revenues and the cost of imported inputs. Therefore, disregarding this variable or analyzing it in isolation from the price of the product can compromise the financial viability of the operation, especially in markets with narrow margins and high sensitivity to cash flow. 

 In this content, we will cover:  

• The impact of exchange rate variation on the commodities market;
• Why an isolated view of risks is detrimental to competitiveness;
• How integrated hedging works and its benefits;
• What are the steps to implement integrated hedging.

 Read on!  

What impact does exchange rate variation have on exporter margins? 

Exchange rate fluctuations directly affect exporters' margins by determining how much of their dollar revenue is effectively converted into local currency. When the real appreciates against the dollar, the amount received after conversion decreases, which can reduce - or even cancel out - the gains obtained from high commodity prices on the international market. 

On the other hand, the devaluation of the real tends to increase the competitiveness of Brazilian products abroad, as it makes them cheaper for international buyers, favoring exports. However, the same movement raises the cost of imported inputs, such as fertilizers, pesticides and machinery, putting pressure on the cost structure and reducing producer profitability. This double effect occurs because Brazil exports many agricultural products, but relies heavily on imported inputs to produce them. 

In addition, there is a close - although not perfect - relationship between the behavior of the dollar and commodity prices. In general, when the American currency strengthens, the prices of dollar-denominated commodities tend to fall, and vice versa. However, structural factors such as crop failures, climatic shocks and variations in Chinese demand can temporarily break this correlation, reinforcing the need for constant monitoring. 

As Guilhermo Marques, Global Head of FX and Listed Derivatives at Hedgepoint, points out, "looking at the exchange rate or the commodity in isolation can be insufficient". Even if one variable moves in favor of the operation, the movement of the other can completely neutralize the result. Efficient risk management must consider the combined impact of these variables on cash flow - the true measure of the operation's financial health. 

What is the most common mistake made by exporting companies when hedging? 

The most recurrent mistake is fragmented hedge management, usually caused by a lack of clarity about the real exposure to risk. It is common for the focus to be solely on the price of the commodity, while the exchange rate variation is neglected. This approach leaves the operation vulnerable to exchange rate movements capable of completely wiping out the margin obtained on the sale. 

The problem intensifies when the commercial and financial areas act in an uncoordinated manner. Many companies believe they are protected by locking in an attractive price for soybeans, corn or sugar, but remain exposed to the moment of currency conversion, which occurs later. When the real appreciates, the projected margin can disappear. 

According to Guilhermo Marques, there is a historical aversion in the Brazilian market to the use of derivative instruments, often associated with negative experiences in the past. However, the real vulnerability factor is precisely the lack of protection. The specialist emphasizes that the aim of hedging is not to predict prices, but to preserve margins - the metric that determines the continuity and competitiveness of the business. 

Why is it dangerous to treat foreign exchange (FX) and commodities as separate exposures? 

Separating FX and commodities as independent exposures creates a false sense of protection and compromises the correct reading of economic risk. Even with the price of the commodity locked in, adverse movements in the exchange rate can significantly deteriorate the financial result. 

In addition, the lack of integration limits the proper use of metrics such as Value at Risk (VaR). VaR only reflects real exposure when it takes into account the combined volatility between the exchange rate and the commodity. Seemingly small fluctuations - of 1% to 5% - can jeopardize already tight margins, especially in sectors such as sugar, coffee, corn and proteins. 

In an environment of high volatility, characterized by geopolitical shocks, changes in global monetary policy and variations in agricultural supply, integrated hedging becomes essential to preserve results and ensure competitiveness.

How does integrated hedging protect margins in volatile scenarios? 

Integrated hedging works as a holistic approach to protecting the operating margin. It allows the client to hedge both the sale of the commodity and the future exchange rate simultaneously. This strategy ensures that the high price of the product and the favorable exchange rate of the dollar are guaranteed. 

To implement this risk management model, Guilhermo Marques, from Hedgepoint Global Markets, suggests a gradual evolution in knowledge of hedging instruments. The process should start with basic concepts and evolve as the company matures. 

Benefits of an integrated approach 

Joint hedging between foreign exchange and commodities brings greater predictability to cash flow and more security for long-term planning. As Marques points out, "the aim of hedging is to protect, not to speculate for gains", stressing that the central focus of these strategies is on preserving profit margins.  

By adopting hedging instruments in an integrated manner, players in the commodities chain reduce the impact of external uncertainties and strengthen the financial sustainability of the business. 

Market intelligence for integrated hedging

Risk management in a volatile environment requires market intelligence and an accurate reading of the global scenario. Exchange rate fluctuations, commodity movements and macroeconomic factors act in an integrated manner, which requires data-based strategies, continuous monitoring and well-founded decisions. 

In this context, operating without technical support significantly increases the risk of the operation. Guilhermo Marques stresses that the first step is to look for a risk manager. According to him, "it's easy to navigate with someone who explains," stressing the importance of avoiding blind decisions and understanding the risks involved, the possibilities for protection and the opportunities for improving margins. 

Hedgepoint combines this didactic approach with global analysis and scenario modeling to support the protection of its clients' margins. In a scenario of high uncertainty, the active management of exchange rates and commodity prices is essential for business sustainability.  

Hedgepoint Global Markets supports the chain's agents in making technical and safe decisions, raising the bar for risk management. Get in touch and find out more about our solutions. 

 
This document has been prepared by Hedgepoint Global Markets LLC and its affiliates ("HPGM") solely for informational and instructional purposes and is not intended to establish obligations or commitments to third parties, nor is it intended to promote an offer, or the solicitation of an offer, to buy or sell any securities, futures, options, currencies and swaps or investment products. Hedgepoint Commodities LLC ("HPC"), a wholly owned entity of HPGM, is an Introducing Broker and a registered member of the National Futures Association. Trading futures, options, currencies and swaps involves significant risk of loss and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Hedgepoint clients should rely on their own independent judgment and that of external advisors before entering into any transaction that is introduced by the company. HPGM and its associates expressly disclaim any liability for any use of the information contained herein that results directly or indirectly in damages of any kind. In the event of questions not resolved by our customer service team (client.services@hedgepointglobal.com), please contact our internal ombudsman channel (ombudsman@hedgepointglobal.com ) or 0800-878 8408/ouvidoria@hedgepointglobal.com (for customers in Brazil only).