Volatile foreign exchange rates are squeezing the UK food and drink industry so tightly that firms are losing substantial profitability and diverting capital away from investment, according to fresh research from currency specialist Lumon Corporate.
Dollar-linked inputs and delayed payments create acute FX exposure
Lumon’s analysis shows that up to 50% of input costs for many manufacturers — covering commodities such as wheat, sugar and cocoa, as well as fuel, machinery and packaging — are denominated in US dollars. That high level of dollar exposure, combined with timing mismatches between when firms pay suppliers and when they receive money from retailers, has produced a steep margin squeeze.
The report calculates an average impact of around 3.33 percentage points off net margin for businesses hit by currency movements — the equivalent of almost a third of a typical margin in the sector. Nearly half of firms surveyed (around 47%) identified delays between supplier payments and customer receipts that amplify exchange-rate risk, while 37% say currency instability has complicated cashflow forecasting.
Cash buffers rise, growth stalls, hedging largely absent
To cope with the uncertainty, companies are holding larger cash reserves: Lumon found that 46% of firms are maintaining higher balances than normal. This defensive stance has consequences for expansion — roughly 45% of businesses report redirecting capital away from investment programmes to cushion against FX shocks.
Despite that vulnerability, the sector remains underprepared for currency volatility. The report finds that a majority — about 59% — use no formal FX hedging tools. Additionally, 74% of leaders do not review their foreign-exchange strategy regularly, with only 14% planning a review within the next 12 months and just 22% working with a specialist FX provider.
"With pressure at both ends of the supply chain, bu"
The report includes a stark set of headline indicators that underline the scale of the problem:
- Net profit impact: -3.33% net margin on average for affected firms
- USD exposure: Up to 50% of input costs denominated in dollars
- Timing gaps: 47% of businesses face payment timing mismatches
- Growth diversion: 45% are diverting capital from investment
- Hedging deficit: 59% currently unhedged
| Metric | Reported figure |
|---|---|
| Net margin erosion | -3.33% |
| Share of input costs in USD | Up to 50% |
| Businesses delaying payments | 47% |
| Businesses holding higher cash buffers | 46% |
| Businesses diverting capital | 45% |
| Businesses unhedged | 59% |
What this means for the supply chain and consumers
The findings point to multiple knock-on effects. Manufacturers squeezed by currency swings may find it harder to invest in productivity, automation or product development, which in turn could raise the cost base for retailers and ultimately consumers. Retail buyers, which Lumon says can be reluctant to allow suppliers to pass on FX-driven increases, are contributing to the pressure on margins.
Operationally, distorted cashflow forecasting makes working capital management more difficult; uncertain margins reduce appetite for long-term contracts and capital projects; and a lack of hedging means firms are exposed to sudden exchange-rate moves without financial defences.
For a sector that supplies essentials and accounts for a large share of manufacturing jobs, sustained profit erosion could have broader economic effects. Reduced investment may also hamper efforts to improve sustainability and efficiency across supply chains, delaying compliance with environmental and regulatory goals.
Options on the table — but action is limited
There are established financial techniques to manage currency risk — from forward contracts and currency options to natural hedging via supplier and customer contract currencies — yet uptake appears low. The report suggests an urgent need for more regular FX strategy reviews within companies and greater engagement with specialist providers.
For policymakers and industry bodies, the research highlights a sector-level vulnerability worth monitoring. Encouraging access to hedging tools for smaller firms, promoting best practice in contract terms, and providing guidance on working-capital management could help reduce systemic risk without distorting commercial relationships between suppliers and retailers.
Until businesses change their approach to managing currency risk, the industry looks set to continue absorbing price shocks that erode margins and slow investment — a trend that may affect prices and choice for British consumers in the months ahead.
