Stephen Ward: Fonterra feels dollar's strength

The continued strength of the dollar is a hot topic in agricultural circles, with several senior executives last week warning about its potential effect on the sector and the economy.

Fonterra chairman Henry van der Heyden switched the spotlight on to the currency during the company's AGM.

It is understood hedging has contributed about $2 billion to Fonterra's earnings in the past three seasons, compared with what it would have got if fully exposed to the spot market. That's nearly $57,000 a supplier a year, based on average shareholder numbers.

Most of Fonterra's earnings are in US dollars and this season's payout forecast of $4.05/kg of milk solids was based on a spot rate for the season of US61c, compared with around US66c now.

While some hedging was in place, not all this season's forex returns could be covered, van der Heyden said after the AGM.

He complained that the combination of high inflation, high interest rates and a high dollar was placing "undue pressure" on exporters and urged the Government to set policy and manage its spending to support the productive sector.

Van der Heyden didn't have specific suggestions but wanted a better balance between the currency, interest rates and inflation.

Dairy Farmers of New Zealand chairman Frank Brenmuhl backed van der Heyden's sentiments, saying the Government needed to watch how its spending drove inflation. He also claimed it had "done nothing to recognise that the majority of our income is coming from agriculture".

Asked to comment on van der Heyden's remarks, Agriculture Minister Jim Anderton said he had sympathy for exporters.

But he said the dollar was around US66c - compared with its post-float average of US58c - because of international market conditions rather than domestic policy settings (although this glossed over the Reserve Bank's need to control inflation by keeping interest rates up).

Anderton also said export industries needed to understand that a stronger exchange rate was an inevitable consequence of economic success.

"So I just think there's a little bit of disingenuousness about this and looking for someone to blame all the time."

It was important that businesses planned for a future in which high exchange rates could become the norm, he said.

"If New Zealand wants to be a first-world, high-performing economy we have to accept that this will mean strong exchange rates."

On the idea of restraining Government spending to curb inflation, Anderton said: "Isn't it funny - on the one hand they say that. Then they ask you to invest more in scientific research and development ... and more on roading, and more on hospitals in rural areas, more on broadband."


Performance anxiety

Before the Fonterra meeting there had been a call for directors to forgo a 7 per cent rise in fees as a sign of solidarity with farmers facing tougher times.

The increase was passed at the AGM but it had the lowest pass mark, just under 60 per cent approval, a possible signal of the level of farmer anxiety over the co-op's performance.

There's been ongoing concern about the level of payout and earnings from value-added activities, such as branded consumer products. The value-added return is effectively the dividend farmers receive for having capital locked up in Fonterra.

At the AGM and afterwards, van der Heyden and chief executive Andrew Ferrier made some pretty frank comments about performance. For example, the co-op's business in Australia - where it has invested nearly $1 billion - wasn't satisfactory. And the Dairy Partners of America joint venture with Nestle was under-performing because of economic conditions in Brazil and Venezuela.

Dairy Farmers' Brenmuhl said after the AGM that farmers had been told for years that things were on track and that investments were going to deliver according to the plans.

"This is the first time that we've actually had an acknowledgement that some of those things are not working according to plan.

"Farmers would have planned differently if they had known that things were not going according to plan ... So I believe that the dairy companies as a whole need to understand that. Farmers need information to actually work on their businesses."

Noting PPG Wrightson's plan to significantly boost investment in Uruguay - a scheme which will likely be pitched heavily at dairy farmers - Brenmuhl said: "If Fonterra wants farmers to invest in more production here in New Zealand then we're going to need better results than we're currently getting."


Growing pains

The horticulture industry is hoping to hear soon about Government measures to address the issue of using foreign labour to combat a projected sector labour shortage of up to 10,000 in the New Year.

Industry representatives met Jim Anderton, Finance Minister Michael Cullen and Employment Minister David Benson-Pope last week to look at solutions.

Last year about 2500 tourists got special permits, issued locally, to work in the sector. The industry now wants these permits issued offshore.

It's also seeking the introduction of a "return worker" system that would allow people to do six to eight months' seasonal work and then return home.

Horticulture NZ chief executive Peter Silcock said numbers could be varied according to need and such a scheme would not be designed to do New Zealanders out of work.