Beneath the surface of Mowi's record-breaking 2023, a subtle shift in financial strategy is unfolding, one that could have significant implications for the company's future profitability. While analysts have focused on the impressive €1,028 million operating profit and the record-high harvest volumes, a closer look at Mowi's currency hedging practices reveals a potentially risky gamble, particularly in light of the volatile Norwegian Krone (NOK).

Mowi, unlike many of its Norwegian peers, operates as a euro company. This seemingly innocuous detail has far-reaching consequences for how the company manages its finances, particularly currency exposure. While other Norwegian salmon farmers have benefited handsomely from the weakening NOK, Mowi, through its hedging practices, has effectively locked itself out of these gains, creating a substantial "lost opportunity cost," as CFO Kristian Ellingsen aptly puts it.

The weakening NOK, which has depreciated by 54% against the euro and a staggering 86% against the dollar since 2012, has presented a windfall for companies reporting in NOK. This gain stems from the time lag between revenue recognition, which occurs immediately at the higher exchange rate, and cost realization, which is delayed due to the lengthy production cycle in salmon farming.

Mowi, however, has hedged away this potential upside, opting for stability over the possibility of windfall profits. This decision, while prudent in theory, has resulted in a tangible financial disadvantage. In Q4 2023 alone, this "lost opportunity cost" amounted to €31 million or €0.38 per kilo for Mowi Norway. Extrapolating this across the entire year paints a stark picture: a whopping €133 million (€0.45 per kilo) relinquished due to the currency hedge.

Hypothetical Scenario: Mowi Unhedged

Let's explore a hypothetical scenario where Mowi didn't hedge its currency exposure. The table below compares Mowi Norway's reported figures with the potential figures had they not hedged:

These figures highlight the magnitude of the opportunity cost Mowi has incurred due to its hedging strategy. The question then arises: is this gamble worth taking?

Mowi's rationale for hedging is understandable. Currency fluctuations can be unpredictable, and hedging offers a degree of stability, protecting against potential losses in case of an unfavorable NOK appreciation. However, the persistence of the NOK's weakness over the past decade, coupled with the substantial opportunity cost, raises concerns about the sustainability of this strategy.

Furthermore, the future trajectory of the NOK remains uncertain. While some argue that the current weakening trend is unsustainable in the long run, predicting currency movements with accuracy is notoriously difficult. If the NOK continues its downward trajectory, Mowi's hedging practices could further exacerbate the gap between its realized profits and the potential gains enjoyed by its NOK-reporting competitors.

Mowi's Strategic Crossroads

Mowi's decision to hedge its currency exposure presents a strategic crossroads. While stability is attractive, the potential for significant lost opportunity costs cannot be ignored. This gamble, particularly in light of the unprecedented NOK weakening, could shape Mowi's profitability for years to come. As the salmon king navigates the choppy waters of currency volatility, the question remains: will its conservative approach prove to be a wise decision, or a missed opportunity of epic proportions?

Visualizing Mowi's Growth

Despite the currency challenges, Mowi continues to demonstrate impressive volume growth. The chart below, derived from the Q4 2023 earnings call transcript, illustrates Mowi's harvest volume growth in Norway over the past few years:

"Fun Fact: Did you know that Mowi's name is derived from the Old Norse word "møy," which means "maiden" or "virgin?" The name reflects the company's commitment to producing the highest quality, pristine salmon."