Coffee and cocoa exporters have been urged to put in place risk management strategies to protect their business from volatile currency, and commodity prices, and ensure business stability, to achieve sustainable growth and expansion.
Exporters in Uganda’s coffee and cocoa sectors have been advised to adopt comprehensive risk management strategies to protect their businesses from market volatility and currency fluctuations, ensuring sustainable growth and expansion.
This was the key message shared during the Absa Bank Business Banking Workshop held at Golden Tulip Hotel on Thursday, which gathered key players from the coffee and cocoa export industry.
Rahmah Masagazi, the head of Financial Market Sales at Absa Bank Uganda, highlighted the importance of managing financial risks and regularly assessing risk exposure to make informed business decisions.
She urged business leaders to carefully evaluate the level of risk they are willing to take, particularly when dealing with large financial transactions.
“If a business is selling $100,000 every month, how much of that amount is truly at risk? Is it necessary to hedge the entire amount, or should only a portion of it be protected to ensure that key expenses are met?” Masagazi posed, emphasizing the need for strategic risk management in currency and commodity markets.
Embracing Hedging Programmes
Group photo after the business workshopMs Masagazi recommended that exporters in the coffee and cocoa industries embrace hedging programs, which provide a structured framework to manage risks associated with fluctuating market conditions.
She explained that hedging allows businesses to protect themselves against unfavorable price movements while still enabling them to benefit from favorable changes in market conditions.
“We should also be willing to determine and identify what the biggest risk is for the business at any given time. Today, it may be foreign exchange risk due to currency volatility, but tomorrow it could be fluctuating commodity prices,” she added.
The recent extreme weather conditions in Brazil and Vietnam have had a significant impact on global coffee supplies, driving prices up and benefiting Ugandan farmers.
However, Ms Masagazi cautioned that businesses must prepare for the possibility of price stabilization when weather conditions normalize in these key supply markets.
“The key question is: What happens to coffee prices when the weather stabilizes in Brazil and Vietnam? How can businesses take advantage of the current high prices while also protecting themselves from future downturns in market conditions?” she noted.
During the workshop, Ms Masagazi also stressed the importance of establishing a formal risk management policy.
“The first thing we ask is for businesses to consider putting in place a risk management policy if they don’t have one. This policy will guide you as an entity and help you identify the tools and strategies needed to effectively manage risks,” she said.
A portfolio approach to risk management, which incorporates a mix of tools, is recommended to minimize earnings volatility.
Ms Masagazi illustrated this concept with an example: “If the currency today is Shs3,710 to the dollar, I would aim to ensure that when I convert my export earnings, I lock in a rate of at least Shs3,750. But should I lock in now, or wait for a potentially better rate of Shs3,760 later? These are the types of decisions businesses must consider when developing a risk management portfolio.”
Strategic Cost Planning
Ann Wachira, the Head of Commercial Asset Financing at Absa Bank, also emphasized the importance of cost planning and strategic decision-making for long-term business growth.
She urged businesses to forecast their profit and loss statements for the upcoming year and develop a clear roadmap for achieving their financial goals.
“You need to plan your costs in advance, knowing how your P&L is going to look over the next 12 months if you’re committing to a facility or entering into a transaction. We at Absa would like to partner with you in mitigating these risks and ensuring business stability,” Wachira said.
As Uganda’s coffee and cocoa sectors continue to expand, exporters must remain vigilant and proactive in managing financial risks.
With the right strategies in place, businesses can weather market fluctuations and ensure sustained profitability and growth.
