Exchange rates and the seafood trade
In this report Globefish investigates the channels through which exchange rate risk influences seafood trade and discuss some risk-mitigating approaches. The report finds that exchange rate movements seem to have a relatively moderate impact on seafood trade flows. Other factors, such as market access, aggregate demand and ability to supply seem more important.
February 27, 2014
Seafood is the world’s most traded food commodity, surpassing trade of well-known agricultural commodities like rice, wheat, coffee and sugar. The share of global seafood production, internationally traded, has been rapidly increasing during the last decades and reached 39 percent in 2010. The increased trade is a strong indication of the increasing opportunities in the seafood market. However, as more producers sell more of their production in international markets, and export-oriented aquaculture industries are growing, these industries are exposed to a new set of trade-related risks. As most trading partners use a different currency, exchange rate risk becomes a part of this picture together with market access, stock and production conditions in other countries, as well as macro-economic factors such as income and demand growth.
There is a substantial literature investigating trade in seafood and causes for different trade patterns. This literature indicates that the market is global for most species, but segmented by species group, although this is a distinction that has become less important in recent years as markets continue to integrate. Relatively few studies have investigated the impact of exchange rates. These studies indicate a high degree of exchange rate pass-through, as one would expect in a competitive industry with limited differentiations.
It is well known that most exchange rates are highly volatile, leading to a substantial risk exposure for anyone engaged in international trade, particularly in the short term. This risk can be mitigated for a cost using future contracts in the short run, typically up to a year. In the long run, structuring revenue and costs to reduce exchange rate impacts is the most viable approach, also for seafood, as long as seafood trade is so important for a country that it will influence exchange rate and macro-economic policy.
Given that there is a global market for many species; one would expect exchange rate developments to be important in influencing trade-flows. However, the aggregate data on seafood trade-flows indicate that this is true only to a very limited extent, and that other factors are more important. Among these, limited flexibility due to e.g. transportation costs in many supply chains, the degree of openness and the ability to pay in specific markets, seem to be the most essential. Consequently, the financial crise of 2008 for instance, had much stronger price and income effects than quantity effects, and accordingly, the traded quantities were surprisingly stable.
The most dramatic changes in trade patterns, that we are aware of, are due to changes in market access and to specific producers not being able to supply markets they have traditionally been serving, following stock collapses or disease problems. Hence, while exchange rates are volatile, there seem to be other factors that are more important for risk exposure when it comes to seafood trade. On the production side, sound fisheries management and good aquaculture practices will reduce the risk of stock collapse or disease problems. On the market side, independently of whether one is a buyer or seller, source diversification seems to be the best strategy to limit the effect of market shocks in any specific market. However, there will then also be a trade-off, as this can potentially reduce scale economies and competitiveness in any specific supply chain.
Frank ASCHE, GLOBEFISH consultant. EXCHANGE RATES AND THE SEAFOOD TRADE GLOBEFISH Research Programme, Vol. 113. Rome, FAO 2014. 43p. Download PDF (via GLOBEFISH)