The exchange rate will play an important role for firms who export goods. Essentially:

A depreciation (devaluation) will make exports cheaper and exporting firms will benefit.
However, firms importing raw materials will face higher costs of imports.
An appreciation makes exports more expensive and reduces the competitiveness of exporting firms.
However, at least raw materials (e.g. cashew) will be cheaper following an appreciation.

Effect of depreciation in the exchange rate;

If there is a depreciation in the value of the Pound, it will make EU exports cheaper, and it will make imports into the EU more expensive.

Impact on incentives

In the long term, it is argued that a depreciation may reduce the incentives for exports to cut costs. The depreciation enables an ‘easy’ increase in their profit margin. There many be less incentive to cut costs and boost productivity. If a firm is facing an appreciation, then they may face a greater incentive to cut costs.
Impact of an appreciation on business

If there is an appreciation in the value of the Pound, e.g. between July 2015 and October 2016 the value of the Pound increased from £1 – €1.1 to £1 = €1.25 The impact will be:

Exports will be more expensive. This will lead to lower demand for EU exports or firms will have to reduce their profit margin.
Imports will be cheaper. The import of raw materials will be cheaper.

Evaluation of changes in the exchange rate on agrobusiness

The effect of the exchange rate on agrobusiness depends on several factors.

1. Elasticity of demand. If there is a depreciation in the value of the Pound, the impact depends on elasticity of demand. If EU firms are selling goods which are price inelastic, then the fall in their foreign price will only have a relatively small increase in demand. If exports are price sensitive, then there will be a bigger percentage increase in demand. Evidence suggests that British goods are increasingly price inelastic and after a depreciation there is a relatively small increase in demand.

2. Economic growth in other countries. In 2016/17, there was a significant depreciation in the value of the Pound, however, the global economy (and EU in particular) were in recession. Therefore, demand for EU exports was weak – despite the lower price.

3. Depends on percentage of raw materials imported. If a EU firm imports raw materials and sells to the domestic market, it may lose out from a depreciation. If a firm imports only a small percentage of raw materials from abroad and sells to Europe, then it will benefit more from a depreciation.

4. It depends why there was an appreciation / depreciation. If there is an appreciation in the Pound because EU labour productivity is increasing, then firms are likely to be able to absorb the stronger Pound. However, if the Pound rises due to speculation or weakness of other countries (e.g. Euro crisis in 2011) then firms may become uncompetitive because the rise in the value of Pound is not related to increased productivity and competitiveness.

5. Inflation? One possible problem of a depreciation is that it could cause inflation. (for more details see whether depreciation causes inflation) If inflation does result, then firms could face costs, such as greater uncertainty.

6. Fixed contracts. Many business use fixed contracts for buying imported raw materials. This means temporary fluctuations in the exchange rate will have little effect. The price of buying imports will be set for up to 12 or 18 months ahead. Exporters may also use future options to hedge against dramatic movements in the exchange rate. These fixed contracts help to reduce the uncertainty around exchange rate movements and mean there can be time lags between changes in the exchange rate and changing costs for business.
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