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Hedges for Banana Farms as Colombia Seeks to Offset Peso

June 06, 2012

Hedges for Farmers as Colombia Seeks to Offset Peso Rally

The government has set aside 85 billion pesos ($47 million) over the past two years to subsidize options taken out by flower, banana and sugarcane exporters. Photographer: Paul Smith/Bloomberg

Colombia’s government is stepping up efforts to persuade farmers to protect themselves from the world’s biggest currency rally, according to the head of the agency in charge of handling the options contracts for growers.

The government will cover as much as 60 percent of the expense for agricultural exporters to buy hedges as an 8.7 percent peso rally this year threatens to fuel job losses, adding to the highest unemployment rate in the Americas. The peso rose against the dollar as the highest benchmark interest rates in three years draw investors seeking alternatives to the near-zero rates in the U.S., Japan and Europe.

The government has set aside 85 billion pesos ($48 million) over the past two years to subsidize options taken out by flower, banana and sugarcane exporters. The program, which comes amid a similar effort in Chile to get farmers to hedge against currency gains, seeks to protect jobs in an industry that accounts for 6.4 percent of the economy and is vulnerable to peso gains that sap revenue.

“Instead of having the exporter become a victim of the exchange rate, we want farmers to learn about hedges and know how to manage the currency risk,” said Luis Eduardo Gomez, head of Finagro, the agency handling the contracts for farmers.

Flower growers cut 30,000 jobs in the past seven years because of the peso’s rally, according to the Association of Colombian Flower Exporters. The industry employs 90,000 and creates another 60,000 jobs indirectly, according to the group.

‘All We Can’

“We’re doing all we can” to ease advances in the peso and protect farmers, President Juan Manuel Santos said in a May 30 meeting with palm-oil producers in northeastern Colombia. He cited the central bank’s daily dollar purchases, the government’s keeping dollar revenue abroad and subsidies on currency hedges.

While the deepening European debt crisis has driven down Brazil’s real by 8 percent and the Mexican peso by 1.1 percent, the Colombian peso has gained this year. The peso’s advance to 1,782.92 per dollar is the best performance among 170 currencies tracked by Bloomberg.

Colombia’s central bank has raised the overnight lending rate nine times since February 2011 to 5.25 percent, bringing it up from a record low 3 percent, as domestic demand and record foreign investment helped power the fastest economic growth since 2007. Banco de la Republica forecasts Latin America’s fifth-largest economy will grow about 5 percent this year after expanding 5.9 percent in 2011.

Lower Cost

By negotiating a bundle of currency options with several banks at the same time, Finagro is able to get a lower cost for farmers, according to Gomez. In the past two months, $222 million in exports have been covered with the hedges offered by the program. The government has assumed 11 billion pesos in costs and farmers 12.6 billion pesos, according to the agency.

Agriculture Minister Juan Camilo Restrepo said on Feb. 22 that the increase in borrowing costs was driving gains in the peso and hurting farm exports and asked policy makers to refrain from raising interest rates further, a sentiment echoed by flower and banana exporters.

“The peso’s appreciation is an irritating issue,” said Rafael Mejia, president of the Colombian Agriculture Society. “We’re trying to get everyone to use” hedges, he said in an interview in April.

Flower Producers

Hedges are used mostly by flower producers, which accounted for 72 percent of the contracts taken out under the government program this year. Banana growers account for 16 percent and sugar-cane growers 5 percent, according to Finagro. Augura, the banana association, has organized government-sponsored classes in the coastal city of Santa Marta and in Medellin for their growers to learn about the hedges.

Finagro set up a hotline for farmers seeking information about hedging, and is sending e-mails to growers groups this year to encourage use of the contracts.

Analibia Lagos, manager of rose-grower Flores Cajica, has been taking advantage of the government program to hedge against currency risk since 2010. Last year, the hedges brought in 12 million pesos to offset the stronger currency and the contracts have brought in 13 million pesos this year, she said in a phone interview from Cajica, about 30 kilometers (19 miles) north of Bogota.

Less for Roses

“The price we get for our roses has pretty much stayed put in the last 10 years, and meanwhile the peso gets stronger and stronger so we get less money,” Lagos said from the three- hectare (seven-acre) farm that employs 23 workers and grows about 200,000 roses monthly that are shipped via a middleman to Japan, Russia, the U.S. and Germany. “We’ve always tried to use the currency hedges. We see it as a type of insurance against the peso’s appreciation, which has really hit us hard.”

Starting this month, Flores Cajica is unable to participate in the government program because the company that exports the roses can’t provide a certificate needed for the farm to be eligible. Lagos says she is worried that without the hedges, sales won’t be enough to pay salaries and bank loans coming due.

“We’ve done all we can to become more efficient, but there comes a point where it becomes very difficult,” Lagos said. A peso stronger than 1,800 is “pretty grave,” she said.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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