The volatile euro and rising price of French oak barrels means wineries must do more with less when it comes to purchasing products from the Eurozone. Although the EUR/USD pair has fallen over the past few months from highs of 1.25 to its current level of 1.16, this could reverse as Italy’s government begins to stabilize. Harvest season is nearly upon us and wineries of all sizes can prepare themselves to manage overseas supplier payments smoothly. Unfortunately, winery operators are not foreign to the challenges of paying cooperage invoices, and many struggle in finding an easy and cost-effective way to pay these Euro denominated purchases. It can be a time-consuming process for wineries to onboard with a bank, a procedure laden with lengthy paperwork and high fees. In my experience, wineries are equally concerned with exchange rates and how to efficiently manage their business.
The True Cost of Inefficient Cross-border Payments
Compared to domestic payments, the experience of sending international payments can feel like a relic of a bygone time. Most wineries are familiar with the headaches caused by sending cross-border payments with barriers ranging from slow processing times to a lack of transparency in transaction fees. An inefficient payments process can damage how a winery runs its business, impacting supplier relationships, productivity and ultimately draining precious resources such as time and manpower.
Supplier relationships – Payments plays a big factor in how wineries can nurture a sustainable and healthy relationship with their suppliers. Reconciling payment information and eliminating payment errors is part and parcel of a winery’s responsibility in ensuring supplier payments are efficient and effective.
Delayed production – Slow processing times for payments can result in production delays.
As McKinsey’s Global Payments Map predicts a 7% growth through 2021 for global payments, competitive pricing, transparency and compliance will continue to factor into the business decision of wineries
Getting Ahead of the Curve
The good news is the future of global payments is on the horizon, enabling wineries to more easily navigate the gauntlet of cross-border transactions with the right partner. No longer reliant on legacy systems or correspondent banking, wineries can look at technology providers to better manage their foreign exchange transactions and supplier payments. While neighbourhood banks offer great customer service, their expertise on global payments can be limited – especially for those wineries that expect to scale in growth or require sophisticated financial services. The benefit of using non-banking providers, such as fintech companies, lies in their specialization that can pay off when it comes to eliminating the traditional challenges of global payments, such as additional transaction costs and lack of transaction visibility.
There are payments providers on the market that can help you assess ahead of time how much a transaction will cost, providing insight to beneficiaries through automated alerts on transmittal dates and amounts. Not only that, but wineries have the ability to meet deadlines by knowing exactly when funds will arrive at their destination and avoid costly errors.
Currency Strategies for Locking in Favorable Barrel Prices
Here are key currency strategies to get the best rates on barrels this season.
- Plan ahead & pay early
The early bird gets the worm and this applies for placing barrel orders early in the season. Cooperage houses make barrels year-round due to demand from wineries in both the Northern Hemisphere and Southern Hemisphere and often carry discounts outside of harvesting season
- Pre-purchase euros with a forward contract to lock in favorable euro rates when the dollar rallies
A forward contract is an agreement to exchange certain amounts of dollars for foreign currency on a future date. Wineries can know how much they will be paying or receiving at a future date by locking in an import purchase or export sale at the current exchange rate. This is beneficial at times wineries want to protect against the risk of a weakened American dollar.
- Use a future contract to remove uncertainty about the future price of a barrel
Similar to a forward contract, a future contract has cost-control benefits for wineries that know they will be purchasing items in the future. Wineries can limit their exposure to unexpected price increases by going long or short to offset pricing volatility at a financial exchange such as the Chicago Mercantile Exchange.
—By: Ed Casey, Vice President, Global Payments at AscendantFX
Ed Casey is the Vice President, Global Payments at AscendantFX. As a commercial foreign exchange executive, Ed has over three decades of experience in corporate foreign exchange in the wine industry Ed works with clients to structure and deliver improved forex and payments solutions to support their revenue goals. His clients include wineries, importers, distributors, spirit companies, and barrel makers.
About AscendantFX
AscendantFX is a non-banking payments provider that works with all wineries and cooperages. If you are looking for a simple and cost-effective way to pay for cooperage invoices and other foreign products, we can help. Please contact ed.casey@ascendantfx.com if you’d like to discuss further.
