Food and beverage manufacturers have so much to consider. Not only are they facing pressure from the increasingly unstable geopolitical state of the world, but the sector operates on incredibly tight margins and, as a result, is highly exposed to even small changes in global trade.
Inflation and supply chain disruptions have already increased financial pressure. And now, the amplified currency volatility is creating further risk for manufacturers reliant on imported inputs. For example, up to 50% of input costs for UK F&B producers tend to be directly or indirectly linked to the US dollar. Many commodities critical to food production, like oil, cocoa, grains, and sugar are often priced in USD, and therefore vulnerable to sudden swings in costs.
Financial risks dominating the sector
The biggest financial risks facing the sector right now can be whittled down into three areas:
Firstly, ingredients and packaging costs are closely linked to and impacted by currency volatility. For instance, when currencies move very sharply, particularly against the dollar, the cost of key commodities like coffee or packaging materials can change in an instant.
Secondly, these foreign exchange fluctuations are often driven by geopolitical events. But these events can also have a knock on effect on the volatility of agricultural commodity prices themselves.
And thirdly, the margin pressure exerted by retailers during negotiations limits how quickly any higher costs can be reflected in shelf prices. Because supermarkets possess so much purchasing power, they place manufacturers in between a rock and a hard place – getting squeezed on both sides by both raw material costs and retailer demands.
The current conflict in the Middle East is undoubtedly the latest geopolitical event to cause ongoing global trade tensions and currency volatility to the UK F&B sector, but this pattern of geopolitical events influencing foreign exchange markets is not new.
The post-Brexit trade adjustments led to increased friction in cross-border transactions, substantial administrative costs for businesses navigating new regulatory landscapes, and a general rise in global trade tension.
Then came the Russia–Ukraine war, which disrupted the grain, fertiliser and energy markets – all leading to higher shipment and container costs, and sending ripple effects worldwide.
What’s abundantly clear is that the industry is deeply impacted by geopolitics. It’s an ongoing reality, not an occasional challenge, and one which must be prepared for by manufacturers. The current state of volatility is not going anywhere anytime soon. As a result, foreign exchange exposure is now an in-built feature of the sector.
How should the sector respond?
Food and drink manufacturers, therefore, should be concerned about both short-term volatility and long-term structural currency shifts. Whilst short-term volatility tends to create operational challenges that in their own right require addressing, businesses need to shift their focus to longer term currency trends.
Manufacturers must pay particular attention to the strength of the US dollar, due to its widespread connections to commodity pricing. By treating foreign exchange risk as a permanent operational factor, rather than an occasional disruption, manufacturers can be better prepared to anticipate and mitigate the effects of currency volatility, related to USD fluctuation, on their profit margins.
Even companies who are actively exploring strategies to increase domestic sourcing – a move often driven by geopolitical considerations or a desire for greater supply chain resilience – should adopt this proactive approach to foreign exchange. That’s because the fundamental pricing mechanism for many critical raw materials remains tied to the US dollar. This means that an understanding and continuous management of USD strength is a necessity for operational stability and profitability in the sector.
Why resilience increasingly depends on financial strategy
Whilst there is still much to learn from the ongoing global trade tensions, we are starting to see adaptation within the F&B sector. For instance, there is a growing financial sophistication amongst small to medium sized manufacturers, with some adopting formal risk management frameworks and policies, such as hedging.
Because SMEs typically operate without the extensive financial infrastructure of multinational companies, they often lack dedicated treasury teams and formal hedging programmes. This has historically made them reactive to currency movements, leaving them vulnerable to sudden swings in costs. However, the current volatile environment is increasingly compelling these businesses to try and plan ahead as much as they can, to mitigate their exposure.
This shift towards proactive risk management amongst SMEs is not merely a defensive measure; it carries significant implications for the broader economic landscape. By actively seeking to reduce currency exposure, SMEs are naturally incentivised to diversify their supply chains across countries and currencies. This reduces reliance on single-source suppliers and fosters resilience against economic shocks.
What’s more, this adaptation is greatly encouraging for the survival and strengthening of national trade, as it promotes more robust business practices that can better withstand external pressures, ultimately contributing to economic stability and growth.
For F&B manufacturers, geopolitical tensions are no longer distant headlines – they now translate directly into currency volatility, higher input costs, and margin pressure. Foreign exchange risk is not a temporary event, but an inherent part of business operations. Rather than getting distracted by the best possible price and the race to the bottom, companies need to focus on the elephant in the room.
Businesses that understand their foreign exchange exposure and where their profit margins are sensitive, and implement a robust policy to address it, will be better positioned to navigate and thrive in the current landscape of uncertainty.
About the author
Louis White is sales director at Lumon Pay, corporate division – the currency risk specialists; with experience in foreign exchange, risk management, and financial analysis.