EuroFinance

This complexity was the focal point at the 2023 EuroFinance International Treasury Management conference, where treasury teams from three food industry behemoths shared their insights and strategies for managing risks in today’s volatile market.

Interfood: mastering commodity trading risks

Interfood, a prominent global player in the dairy commodity trading sector, manoeuvres through the intricacies of international trade within an industry characterised by high volume and low margins. With a significant turnover of approximately $3.5 billion, the organisation’s strategic risk management practices are vital for sustaining financial stability and market competitiveness. Central to Interfood’s operations is a robust financial infrastructure, supported by a network of six banks offering around $520 million in banking lines. 

This foundational support is indispensable for the company as it manages the challenges of currency fluctuations, commodity price volatility, and geopolitical uncertainties across its global operations. By integrating this financial base with comprehensive risk management strategies, Interfood’s treasury team effectively addresses the complexities inherent in global dairy markets, ensuring the company’s agility and resilience in the face of diverse market dynamics.

For instance, given its extensive international operations, Interfood encounters currency risk. The fluctuation of exchange rates can unpredictably affect the company’s profit margins, necessitating a robust strategy for mitigation. To address this, the treasury team employs an arsenal of hedging strategies, including the use of forward contracts, options, and swaps. These financial instruments are carefully selected to align with the company’s exposure, or limit potential losses from adverse currency movements. Their integrated treasury management system streamlines the execution of these derivatives products.

Furthermore, the volatility of commodity prices presents another layer of risk, influenced by a complex interplay of supply and demand, variable weather conditions, and geopolitical shifts. Interfood’s response encompasses a blend of physical and financial hedging tactics. On the physical side, strategic decisions around the procurement, sale, and storage of dairy commodities allow the company to buffer against short-term price fluctuations. Financially, the company leverages the use of dairy derivatives available on commodity exchanges to secure more stable pricing. 

“Within the commodity markets, Interfood’s treasury team plays a pivotal role in providing liquidity for essential business activities in a cost effective way. This necessitates a dynamic financing structure encompassing multiple sources of funding and a diverse portfolio of financial instruments across various currencies.” Vincent Almering, Group Treasurer at Interfood told delegates at the conference.

Meanwhile, operational and geopolitical risks require the company to maintain a dynamic and flexible supply chain. The company’s strategy involves broadening its sourcing and market footprint, ensuring that it is not overly reliant on any single region or supplier. This diversification serves as a hedge against localised disruptions, whether they be due to political unrest, regulatory changes, or natural disasters. In addition to its foundational strategies, the commercial and supply chain team utilise advanced analytics and market intelligence platforms, to gain access to real-time data and insights, which are instrumental in making timely and informed decisions. 

Furthermore, the treasury team places significant importance on engaging with its stakeholders, including banks, suppliers, and clients, as an integral part of its risk management framework. Through open and consistent communication, the treasury team cultivates strong relationships that align all parties with the company’s objectives. This collaborative ethos not only smooths transaction processes but also opens avenues for negotiating better terms and uncovering new opportunities. Such engagements are pivotal in ensuring that Interfood’s risk management strategies are comprehensive, addressing both internal operational needs and external market conditions.

OFI: sourcing and sustainability in the food ingredients sector

OFI (Olam Food Ingredients) operates in the food ingredients sector, focusing on cocoa, coffee, edible nuts, spices, and dairy. With a turnover of over $11 billion, and a sourcing network that spans over 2.75 million farmers across 50 countries, the treasury team confronts a spectrum of challenges and risks inherent to its global operations and commitment to sustainability. 

Central to OFI’s operational ethos is a strategic global sourcing strategy, crucial for delivering high-quality ingredients to its clientele. This strategy, while pivotal, exposes OFI to risks such as currency fluctuations, commodity price volatility, and potential supply chain disruptions. In response to the diverse risks posed by their global operations, OFI’s treasury team has developed a comprehensive risk mitigation strategy. This strategy integrates financial hedging, the development of strategic partnerships, and the deployment of an advanced supply chain management system to preserve the company’s operational integrity. The team’s efforts are particularly focused on managing the volatility of agricultural commodity prices and the associated currency risks that significantly impact OFI’s financial health.

By employing a combination of forward contracts and options, the treasury team effectively hedges against currency fluctuations. This strategy stabilizes input costs and safeguards profit margins by locking in favorable exchange rates, thus reducing the adverse effects of currency volatility on costs and boosting overall profitability.

Furthermore, OFI places a strong focus on sustainability and ethical sourcing, aligning with the growing demand for responsibly produced goods. The treasury team is actively involved in supporting sustainability initiatives, which include efforts to promote sustainable farming practices and enhance the livelihoods of farmers within OFI’s supply chain. The company invests in improving agricultural practices, biodiversity conservation, and the enforcement of fair labour practices, aiming to maintain the integrity of its supply chain and address potential environmental and social risks. These initiatives are managed in collaboration with sustainability officers to ensure that investments are allocated effectively, contributing to OFI’s broader risk management efforts.

In addition, the treasury team leverages technology to improve transparency and sustainability throughout its supply chain. The company utilises tools that track the carbon footprint from production to delivery, aiding in informed sourcing decisions and reducing environmental impact. These measures, while essential for maintaining ethical operations, also illustrate OFI’s approach to integrating technology and sustainability in its business practices.

Lerøy Seafood Group: A harmonised approach to currency and environmental challenges

Lerøy Seafood Group stands as a beacon in the seafood industry, seamlessly blending sustainability with economic performance to supply the world with over 5 million meals daily. The significant portion of its revenue generated in foreign currency, combined with its unwavering commitment to sustainable practices in seafood production, introduces distinct challenges. Lerøy’s treasury team has developed sophisticated risk management strategies to effectively tackle these issues, with a particular focus on managing currency risk and environmental sustainability.

Currency risk management is paramount for Lerøy, as about 80% of its revenue comes from foreign currency transactions and therefore, the treasury team’s strategy encompasses a broad use of forward contracts, options, and natural hedging techniques, balancing currency inflows and outflows and employing financial derivatives to shield the company from unfavourable currency shifts. 

Beyond reactive measures, the treasury team also adopts a dynamic stance in currency hedging, aligning its strategies with long-term business goals and adapting to market shifts. This involves continuous evaluation and adjustment of hedging positions to ensure optimal coverage and flexibility. 

Furthermore, for Lerøy, sustainability is a crucial aspect of its overarching risk management strategy. The company is keenly focused on the environmental challenges unique to the seafood industry, including climate change and ocean health. It’s committed to spearheading sustainability initiatives aimed at both reducing environmental impact and enhancing the sustainability of aquaculture practices. 

The treasury team plays an instrumental role in this mission, actively securing funding for various projects that aim to introduce more eco-friendly production methods and technologies. These investments target practices that boost operational efficiency while minimising environmental footprints, such as the development of innovative fish feed formulas that reduce reliance on wild fish stocks and efforts to improve fish health and welfare.

Moreover, Lerøy’s approach to sustainability is also financially strategic, utilising green financing mechanisms like green bonds and sustainability-linked loans. These instruments are integral to funding strategy for its environmental projects, with terms directly linked to achieving specific sustainability metrics. 

The insights shared by the treasurers underscore the treasury’s evolving role in navigating the complex web of risks facing global businesses today. From leveraging financial instruments like derivatives to engaging in strategic initiatives aimed at operational resilience and sustainability, treasury teams are expanding their toolkit to address the multifaceted nature of risk in the modern business environment.