Zespri's dollar each way has sour taste

Kiwifruit exporter Zespri was hit by more than $50 million in foreign exchange contract losses last year and has factored in an even higher loss this year.

Financial statements released in its annual report this week show Zespri lost $50.4 million in the year to March 31 on derivative contracts and at that date expected to make a further $82.6 million loss this year.

The exporter uses derivative contracts to protect itself against currency fluctuations in the different markets it sells kiwifruit into.

But if it makes the wrong call - by picking the currency will be either higher or lower than it turns out to be - hedging can be a costly exercise. Losses incurred through hedging must come out of the income growers are paid by Zespri.

Of the $50.4 million, $44.386 million was recouped out of New Zealand supplier agreements and $5.99 million came from other financial liabilities. This left Zespri with a foreign exchange gain of $6.2 million.

Jeff Wesley, managing director of Turners & Growers, which wants Zespri's monopoly removed, said many growers would be unused to reading financial statements and might not be aware of the foreign exchange losses incurred on their behalf.

He likened the situation to former apple and pear exporter ENZA. It used foreign exchange contracts to boost earnings for five years until the New Zealand dollar crashed in 1998.

Its growers had to pay the costs of the contracts out of fruit returns. In the first year it cost them $72 million, then $55 million.

ENZA changed its policy to shorten contracts. It was then corporatised, which led growers to believe they would have no more to pay.

But a further $50 million loss on foreign exchange saw a long dispute between growers and ENZA, settled in 2001.

Zespri chief financial officer Mervyn Dallas said the company employed prudent hedging strategies with the aim of smoothing out volatility, particularly during global economic uncertainty.

"At the time the figures were compiled for the annual report, the spot-rate currency calculation showed an unrealised loss of $82 million for the 2009 year. This is not an actual loss, just a theoretical calculation at a point in time.

"The market has significantly shifted since the end of the financial year and we are pleased to report that, at this current point in time, we are sitting on a $5 million gain on our foreign exchange contracts."

Dallas said the $50.4 million loss for the 2008 year was an improvement on the previous year.

"The actual results for the 2008 season showed a $52 million improvement versus the prior season result, in respect to foreign exchange."

Zespri did all it could to communicate to growers its foreign exchange and hedging strategies on a regular basis, he said.

Turners & Growers this week sent a paper to the Government calling for Zespri's monopoly to be removed, citing abuses of market power and potential loss of export and research and development dollars if it continues. Zespri and its growers oppose this.