Monsanto Corporation and the Chinese Market (Essay Sample)

Monsanto Corporation and the Chinese Market Student’s Name Institutional Affiliation Monsanto Corporation and the Chinese Market Monsanto is an American agricultural company that offers sustainability in the agricultural sector. It deals in agricultural products that are essential for farmers across the world. Thy aim at empowering farmers, both small scale, and large scale , for increased production in their pieces of land and the same time their seed brands in crops like oilseeds, cotton, corn, fruits and even vegetables. They also produce seed trait technology that protects the yield of the farmers and, reducing their on-farm costs and supporting their on-farm efficiency. They have been striving to make their products available all over the world by broadly licensing their seed and trait technology to other companies. The company also manufactures Roundup and herbicides that are used by farmers, consumers and lawn and garden professionals. Farmers are the target market for Monsanto Company. They are the reason why it still runs its operations all over the world. It is for this reason that the company has a viable market in China. Farming in China is a vital industry that has employed over 300 million farmers. The country has been ranked among the top in worldwide farm output. The country's primary produce is soybeans, oilseed, cotton, barley, millet, tea, peanuts, sorghum, tomatoes, potatoes, wheat and rice. Monsanto Company has however been barred from accessing the China market recently. The company that had earlier told American farmers growing GMO Roundup Ready soybeans that the Chinese government had approved the import of the product was met with a rude shock when the China Ministry of Agriculture sent a letter to Food Safety Volunteers clearly stating that they never accepted Monsanto’s safety evaluation application materialCITATION Sus16 \l 1089 (Sustainable Pulse, 2016). In 2014, China's Central Bank decided to double the trading range to 2% in either direction of a daily rate that is set by the government. This policy lets the Yuan's value move up and down more than it did before. Although financial experts had applauded the government in for taking the necessary step to achieve financial reforms, it caught most investors off guard CITATION CNN14 \l 1033 (CNNmoney, 2014). Since its devaluation in August last year when the fixing rate was moved to around 3% lower than the U.S. dollar, the Yuan has been suffering a sharp depreciation against the dollar. The beginning of 2016 marked the weakest position of the Yuan in five years, although it has since recovered in line with a weak Dollar and stabilization in the Chinese markets. In a bid to stimulate the Chinese economy, the central bank has been forced to conduct a series of cuts on interest rates with the benchmark interest rate being lowered to 4.35%, 25 basis points lower in October. The People’s Bank of China is expected to get more pressure to further into the year, to increase stimulus. Chinese authorities have also been selling U.S. dollars so that they can support the Yuan and stem capital flows in a bid to curb the decline in foreign exchange reserves. The foreign exchange reserves have fallen to a near-five year low in the past eighteen months, a quarter lowerCITATION Enr16 \l 1033 (Alvarez, 2016). The Chinese Financial market has been stabilizing giving support to the Yuan. The sharp sell-off in the stock market that was seen in the second half of 2015 is attributed to this stabilization. There has been an excessive focus on China in the recent decline in the stock market but this may not cause any further devaluation that may be significant for the Chines Yuan because only about 20% of the Chinese wealth is held in shares. The foreign exchange reserves have also stabilized after a sharp drop. This a reflection the valuation effects from the weakness of the dollar and a slow slowing on capital outflows as Chinese authorities tighten controls. The exchange rate between currencies fluctuates over time, and can lead to unexpected gains or losses. Currency exchange rate risk includes transaction exposure, translation exposure, and economic exposure. A firm that has cash flows that contractual is said to have transaction exposure. In the event that a contract is dominated by a foreign currency, the cash flows will be subjected to exchange rates that change unanticipated. An example of a transaction exposure is when n the Monsanto corporation goes for a loan of ¥100 million for a 1-year term at an interest rate of 3% per year in the international financial market. The company then changes the loan to one million U.S. dollars at the existing exchange rate. The company need will be in need of ¥103 million so that it can repay the loan that is Yen dominated. The company has to pay about $1,144,444 so that it can buy ¥103 million if the exchange rate of $1=¥90 has not changed. The company actually has to pay about $144,444 more. The degree to which a financial report will be affected by movements in the exchange rate is the firm’s translation exposure. Translation risk includes foreign assets that are being held in a foreign currency being revalued. An exchange loss or gain will be created by this revalued. A translation exposure can be seen if Monsanto Corporation’s bank account has one million U.S dollars currently. Since the exchange rate is $1=¥6.14 the bank account holds 6.14 million Chinese Yuan.in the event that the Chinese Yuan appreciates and the U.S dollar depreciates, for instance, $1=¥6 being the new exchange rate, then the one million U.S dollars can be moved into 6 million Chinese Yuan. The money will have reduced by 140,000 Chinese Yuan in the process of translation. This is an example of a translation exposure (if the corporation was based in China) CITATION Hou13 \l 1033 (Hou, 2013). The risk of the market value of a company changing due to exchange rate fluctuations is referred to as the Economic Exposure. It is also called the operating exposure. A rise or fall in the exchange rate of a currency will affect the production cost and the price of selling. This change might affect profits in long run. Country Risk entails economic and political risk which may affect its businesses. Political risk occurs when changes are made in a government of a country which leads to the risk of losing money. Some of the extreme examples that may lead to political risk are military coups, trade barriers, terrorism and acts of war. Economic Risk occurs when a country’s ability to repay debts is affected. Economic indicator movements in the foreign country such as GDP, unemployment, purchasing power, inflation, etc. are important measurements for economic risk. Some of the important measurements in foreign countries that are associated with economic risk are inflation, power to purchase, unemployment and the GDP. The Monsanto Corporation can however mitigate or eliminate the foreign exchange rate risk by a change in asset and liability position in the foreign currency. This can be achieved in a number of ways. The first way of doing this is by entering a money market hedge. This can be achieved by lending or borrowing money from the money market. This will offset the exposed position of the corporation in a foreign currency. The second strategy is by purchasing forward exchange contracts. This is a commitment to for selling or buying at a later date that is not specified, one the Yuan for a stated amount in U.S. dollars at an exchange rate that has been specified. The third way of doing this is by using Chinese currency options. This can be done in three ways; the first options is the physical currency that is bought on the over-the-counter market. The organized exchange is the second option on the physical currency and the third option on future contracts monetary markets. The fourth way for the corporation can hedge the risks in foreign exchange rates by relocation money by lagging and leading the time at when the corporation makes financial or operational payments. Forward market and money hedge are often not sufficient in eliminating the exchange risks. In these scenarios, risk can be reduced through lagging and leading. The fifth way is by ensuring that there is an equilibrium between the payables and receivables denominated in Chinese currency. Multilateral netting centers can be put up as special departments to take care of the outstanding affiliates’ balances to the corporation with each other on a net basis. The major advantage of doing this is that it reduces the costs that are to be incurred with many separate foreign exchange transactions. The sixth way is by positioning of funds by the use of transfer pricing. A transfer corporation is a price that the corporation will be selling its goods and services to its foreign affiliatesCITATION Lie09 \l 1033 (Dharma, 2009). The Corporation's management has to increase the effort that is being put to enter the Chinese market. The potential market is quite big and the corporation has to overlook the setback...