Exchange rate exposure of agricultural cooperatives

The exchange rate exposure of firms has been the focus of growing academic interest in the last 15 years. Former studies examined the exposure faced by banks, publicly traded companies, US and international companies and public firms in emerging markets. However, private companies have not been scrutinized, due to limited data access. Using a unique dataset, this paper examines the exchange rate exposures faced by 66 Brazilian agricultural cooperatives between 2000 and 2015. Furthermore, a considerable number of studies have attested that companies located in countries that adopt a fixed currency regime are more exposed than firms in free-floating regimes. Nevertheless, in the “gray area”, there is a lack of evidence as to whether a more intervening Central Bank is beneficial to local companies. The Brazilian economy is a natural experiment to examine this relationship. After 2007, the government adopted a “managed” exchange policy to face the financial crisis.

My sample is composed of the quarterly financial statements of these cooperatives within the parameters described above. Exposure is assessed by the impact of the variation of exchange rates in the cash flow of the firms. To control for alternative explanations for the results, I follow Martin and Mauer (2005), employing the variation of the exchange rate that is not explained by changes in interest rates and economic activity (residual) as the independent variable, whereas the dependent variable is the variation of the cash flow that is not explained by corresponding past cash flows (residual).

The results show that around one third of the sampled cooperatives showed significant currency exposure in the period, which is similar to previous literature for public companies using the cash-flow approach (Martin and Mauer, 2005). As expected, the majority of the firms presented a positive coefficient for the relation, which is consistent with the Brazilian agricultural cooperatives being important local exporters. Furthermore, the Central Bank seemed to play a significant role in the exposure of the sampled firms, since the proportion of exposed cooperatives rose from 22% during the “pure” free float regime (2000-2007) to 47% in the period of the “managed” float regime (2008-2015). Finally, I documented that size and investment in working capital are important drivers of currency exposure for agricultural cooperatives. My findings have implications for policy makers of exchange rate regimes in emerging markets, as well as to those in charge of a firm’s risk management.