How the lower euro value against the dollar helps and hurts local businesses
It's good news for U.S. travelers and companies. It costs less to travel to Europe and buy products from there. Yet it's also a challenge for North Coast businesses dependent on international travelers and for the region's wine business suppliers that buy raw materials for corks, barrels and other items to be made.
The U.S. Dollar Index, which tracks the value of American currency against six currencies, has increased 11.3% this year to a two-decade high, the Associated Press reported. The euro was worth just under £1.02 as of July 20, down from £1.18 a year earlier.
At Rivercap USA, a Solano County-based distributor of tin capsules used to cover the neck and cork in wine bottles, the cost of raw materials doubled in the past two years, causing a price rise of 60% to 100% per capsule, according to Jeremy Bell, general manager. "The benefits are you're bringing it in from Europe, so your costs go down," Bell said about the benefit of the lower value of the euro. "Problem is that with tin the raw material is priced in dollars, so the manufacturer overseas is buying the tin in dollars, so it's costing them more to buy the tin. You win on one side, and you lose on the other side."
While the price of raw tin has retreated from the peak of £50,000 a ton on March 10 to roughly £25,000 since early May, European capsule manufacturers have to pay more euros to buy the tin. And because the capsule makers pay up front to buy the raw tin on the London Metal Exchange and Rivercap pays cash on delivery, Bell said that prevents the use of a common currency-exchange risk mitigation strategy: forward contracts. Forward contracts are a common international currency hedging tool that allows the buyer to lock in an exchange rate to be paid at a specified time commonly up to 12 months later.
A company wins if the contract rate is lower than that of the time of payment but loses if the rate is higher. "It would be nice if we could stock up," Bell said. "But unfortunately, (tin capsules are) a custom product." Tin is typically the capsule of choice for vintners of ultrapremium wines, or that which retails often for over £30 a bottle and certainly over £20, Bell said.
The cost per such capsule roughly has moved from 20 to 25 cents each up to 40 cents then back down slightly. Lower-priced wines often use plastic capsules or aluminum screwcaps, though the latter have been increasingly adopted for higher-end bottles. A major factory for screwcaps in the world is in Ukraine and has been offline since the latest conflict with Russia began earlier this year.
Higher-end vintners tend to customize their capsules, and a common order involves something specific to the vintage on the capsule, Bell said. "We can't stock up on a vintage-dated product," Bell said. Another premium production item North Coast vintners import from Europe are oak barrels.
Higher-priced ones coming made with French wood, but Eastern European oak has been gaining traction. The lower value of the euro to the dollar has allowed Tonnellerie O in Benicia to spend less when buying French oak staves and barrel alternatives such as chips, according to Josh Trowbridge, CEO. "This is the strongest the U.S. dollar has been in my career, but it is offset by the shipping costs," Trowbridge said. "With the strength of the dollar, we're considering buying more.
We're having a record year for barrel sales. It's challenging to keep staff on to make them." In a 10-hour shift, the crew of about a dozen at the cooperage assembles, toasts and finishes about 53 barrels.
The operation's oak alternatives facility, which toasts staves and chips for barrel and tank inserts, is more automated and operates around the clock. The company's international exchange strategy is to use dollar-cost averaging, which smooths out wins and losses on the rate over time. And the life cycle of a wine barrel starts long before it rolls into a winery.
Tonnellerie O buys the wood from French suppliers two to five years before the coopers take over, so the green wood is stockpiled to season. "It doesn't make sense to do currency contracts," Trowbridge said. "It's a lot like a winery that builds up inventory for a few years before release, so we want to conserve cash and lower debt. If we buy currency contracts, it is immediately on your books as debt."
And then the European wood staves are transported to the U.S. for coopering, rather than shipping empty finished barrels.