As an exporter we get cold calls at least once a week from currency brokers,’ says Trevor Debenham, CFO of Somerdale International. ‘I have been in meetings where they scribble complex derivatives options. I let them finish and then say I’m not interested.’
Debenham is an old hand at managing currencies. Somerset-based Somerdale has exported premium British-made cheeses to more than 50 countries for the past quarter of a century. It is now the leading exporter of British cheese to the US, while other markets include China, Australia and Brazil. Almost all of its £32 million turnover is from exports, so the company’s strategy is shaped by long experience. ‘I can tell you what to do in currency hedging,’ says Debenham. ‘But mostly it’s what not to do.’
Debenham’s main piece of advice is to avoid the siren song of currency brokers, who try to lure companies into the rocky waters of speculation.
Currency broker turned whistleblower Satyajit Das chronicled the dubious exploits of the FX industry in his book Traders, Guns & Money. He tells of an Indonesian noodle-maker who believed brokers’ lavish promises of risk-free returns. The board lost interest in noodle-making, preferring to pursue trades they did not understand.
In the end, says Das, the noodle-maker ‘had mortgaged its future to factors over which it had no control. They needed divine intervention to save themselves from their own folly. In the end, the miracle was not forthcoming.’
It was not the only business to see FX as a way to make profits, rather than hedge, with poor results. Somerdale prefers to trade the lure of gains for stability. ‘What you want is certainty,’ says Debenham.
His FX management method is based on ‘vanilla’ forward contracts. They fix the exchange rate at some point a few months ahead. Contracts are engaged in a layered pattern. ‘We do 20%, then wait, and then do another 20%, and then another 20% and so on. This smooths the rate. Fix for six months on a single day and you have a high concentration of risk. You could get it right and be a hero, or get it wrong. We’re happy to take the average.’
A second round of de-risking can be undertaken by selling to selected markets only in sterling, passing the risk on to customers. ‘Of course, they might want something in return, such as better margins,’ says Debenham.
Political events can provoke market volatility. Some companies try to forecast turbulence and take extra measures, but Somerdale’s policy is to avoid such speculation.
‘We tend not to second-guess the market,’ says Debenham. ‘Political risk is already priced into the market.’ The approach means Somerdale can trade globally with little concern for FX movements. ‘We make money selling cheese, not speculating,’ says Debenham.
Fast facts about Somerdale
 Somerdale International is in its 27th year of operation
 It exports British cheese to more than 50 countries
 It is the leading exporter of British cheese to the US with shipments leaving for New York every week
 Exports represent around 95% of its turnover and 2017 saw the company add the Philippines to its overseas markets
 Somerdale received the Queen’s Award for Enterprise in International Trade in 2009 and 2016
Find out more about Somerdale International
Words: Charles Orton-Jones