Oil and currency moves should be seen as threats

by Morton Sosland
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It is a rare year in which two Black Swan business-related events occur within twelve months, making even rarer the two coinciding early in 2015. The reference is to the precipitous plunge in oil prices and the action of the Swiss National Bank in removing the Swiss currency’s cap against the euro. Both deserve the Black Swan designation on account of how they match the term’s widely accepted definition of being unexpected and of difficult-to-define global consequences occurring when no one expected and where the consequences play over a long period. When related to food manufacturing, such past surprises have had significant impact, but that has not been so with this year’s events. That prompts the suggestion that considerable wariness is justified in waiting and watching.

When it comes to examining the drop of 50% and more in oil prices that began late in 2014 and continued at an equally sharp rate this year, making the case that this development is other than favorable for the food industry is itself difficult. After all, rising energy prices had been one of the industry’s principal cost concerns for a number of years when oil prices steadily climbed to reach $100 per barrel and above and seemed stuck at $100-plus for a very long time. The real surprise came with the recent fall to below $50 per barrel, bringing fuel and manufacturing costs down to much less expensive levels.

Still to unfold as a force affecting the food business is how this price collapse may exert negative consequences for large American areas where it is reducing employment as well as undermining what had been regarded as statewide prosperity. Some economists have warned that the worrying oil effect will extend its reach into many other parts, including personal incomes and retail sales. Focusing on the possibly significant impact on American prosperity overlooks the weight of sharply lower prices on nations like Russia and in the Middle East that rely on oil exports for fiscal strength. How these regions might react is unfolding, creating questions about the effect on the world economy.

If an example is needed of how surprises reverberate, it is unnecessary to look beyond the Swiss currency cap-lifting. Seldom has a move by a central bank, including America’s Federal Reserve, had as pronounced an effect as did that action. Its influence, while directly related to the country that is one of the smallest, weighed heavily on global share prices, especially of large banks that had many of their obligations in terms of Swiss francs. Subsequent surveys have revealed that few companies in industries like food manufacturing were engaged in borrowing substantial sums denominated in this currency, which has soared to new highs. Instead, major financial institutions, including those featuring foreign exchange services, have been victims. The result is a global financial environment reeling from susceptibility to such an event.

While currency hedging, which ought to be pursued diligently by companies having significant exposures beyond the dollar, would have provided protection, the dimensions of what happened did cause a few horrifying losses. A 20% rise in the value of the Swiss franc, the immediate result of the cap lifting, was unprecedented as a reaction to such a surprise. Nestle SA, the world’s largest food maker that is also based in Switzerland, had been an active buyer of its own shares, taking a daily maximum of 1.3 million shares in five days preceding the central bank’s action. These purchases involved daily outlays of as much as $100 million. This action eased the effect of the currency move on Nestle’s share price and was credited to the intelligent position taking by this company. Little is known about similar actions that may have been taken by other food companies, in America or elsewhere, but let it be known that the existence of these two Black Swans stands as a warning to food companies of all sizes and locations.
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