Hedging currency risk for agriculture - Harald Hirschhofer

Harald Hirschhofer, Senior Advisor at TCX Fund, explains how foreign exchange movements represent a major but often underestimated risk for producers, processors and traders of agricultural produce and the institutions that lend to them – and how TCX’s offering of long-term FX hedges and synthetic local currency loans can help the sector mitigate this risk affordably.

The risks

A number of currency mismatches inject instability into the finances of agricultural players.

Borrowers in emerging markets who need finance for long-term assets typically have only one long-term financing option: borrowing in foreign currencies such as the US dollar. If they are paid for their produce in local currencies, any sudden weakening of the home currency makes repayments on these loans expensive and potentially unsustainable, notes Hirschhofer.

To avoid this, they should borrow in local currency. But if loans are offered at all in local currencies by local banks, these have short tenors that don’t match the long-term nature of the assets they are funding.

Eliminating these mismatches could “provide another piece in the puzzle to allow the agricultural sector to grow more smoothly and rapidly,” says Hirschhofer.

From a developmental perspective, effective FX hedging could also have a “very important social and poverty alleviation impact,” seeing as it is often the poorest people in a society that shoulder currency risks, he notes.

Many borrowers however underestimate the currency risk they are exposed to. Some take too short-term a view of currency volatility, looking back no more than two or three quarters to form an opinion on future FX moves. In fact, such relatively short periods of stability can represent the “quiet before the storm,” leaving borrowers badly burned if volatility suddenly spikes, he says.

Other borrowers may be seduced by the low interest rates available on US dollar loans compared with hedged local-currency loans, without factoring in how quickly a strengthening in the dollar may wipe out that price advantage, Hirschhofer says.

Long-term currency hedges

While in many emerging markets it is possible to buy currency hedges from local commercial banks, these tend to be short term, making them suitable only for short-term trade finance. For longer-term investment, for example in infrastructure, hedging with TCX may often the only or most cost-effective solution, Hirschhofer says.

TCX is able to provide long-term hedges of up to 15 years on more than 70 currencies. It offers cross-currency swaps or forwards, typically to hedge the lender, which can then provide a local currency loan to borrowers.

Working on an “additionality principle,” TCX only offers its hedges in frontier and less-liquid markets where commercial financial institutions are not providing a solution. “We have a privileged capital structure so we don’t want to compete with them,” Hirschhofer says. That said, its hedges are not subsidised, with each swap priced to fully reflect the risks that TCX assumes, he stresses.

At the same time, there is a potential role in the market for donors that would be willing to provide insurance products or other FX hedges at concessional rates to very small-scale farmers or other low-income portions of populations, especially in very volatile currencies or high-risk markets, Hirschhofer argues. Supporting adequate distribution channels for small scale lending and dealing with credit risk remains however a challenge.

Trickle-down protection

One obstacle that has prevented TCX from being able to serve the agricultural sector to date is that as a wholesaler its offering is less suited to the very small transactions that individual farmers might require.

Because of its large upfront costs, TCX’s minimum transaction size for one-off deals is US$5 million but this does not apply to banks with which it forms a relationship and conducts multiple transactions. For this reason, it is looking to build relationships with commercial banks, mobile financial services providers and other aggregators that serve the sector.

“I’m optimistic that we can deploy our hedging services for agriculture because people are increasingly recognising that FX risk is a real problem,” especially at a time when development banks are becoming reluctant to provide US dollar loans to borrowers without a dollar income, Hirschhofer says.

Also, “there is a group of aggregator vehicles emerging that will make it easier for TCX to deliver its products on a wholesale basis,” he says. “We are increasingly reaching out to such new players to help them de-risk their investments into Africa, and I think that will be very helpful for agricultural finance that these investments can flow into the sector via appropriate vehicles.”

The proliferation of mobile banking and advanced credit scoring mechanisms using big data should accelerate access to local currency finance, he adds.


One big focus for TCX that has an indirect but potentially large impact on agriculture is transactions that promote access to energy such as biogas, solar installations and other renewables.

Insufficient access to refrigeration, for example, remains a big challenge for agricultural value chains in Africa, with a large share of crops rotting before they reach a market. By de-risking transactions that expand the sector’s access to energy and related long-term investments, TCX hopes to contribute to improving value chain efficiency, Hirschhofer says.


By Helen Castell