Creaming it

By Linda Sanders In Money

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Creaming it

Photo / Listener Photo Illustration

Reader Melissa Bray has posed a question of particular interest when New Zealand’s currency is strong and drought has the potential to cut
the country’s income. “Why is it that in a time when the New Zealand dollar is so high and affecting the country’s exporters, Fonterra remains hugely profitable? Is the cost of New Zealand dairy farming way off what the actual cost should be? Why is Fonterra not loudly lobbying the Government to force down the New Zealand dollar?”

Essentially, Fonterra is a winner in the high dollar stakes because it is such a big player. It is big by any standards: it sells to 100 countries, generates nearly $20 billion in annual revenue and makes about $1 billion in earnings before interest and tax.

To give you an idea of the company’s importance, it is the world’s biggest milk processor and is the main reason we top the world in terms of
protein production relative to GDP.

Fonterra is also enjoying the benefits of seemingly unstoppable demand for food exports. The record prices the company and our farmers are enjoying are the best seen in decades. So yes, our cow cockies are doing very well.

The high demand for our exports is also the main contributor to exchange-rate strength. Our dollar is high because our main exporter is performing and delivering high export prices.

Unfortunately, it doesn’t benefit all exporters, as our manufacturers and the tourism sector tell us, because most are relatively small fry. On the plus side, though, the high dollar is keeping down inflation because it make imports cheaper.

As Westpac chief economist Dominick Stephens puts it, although the dollar may be causing pain in some sectors, having such a dominant food exporter means we have been better able to “roll with the punches” dished out by the world economy.

Such is New Zealand’s clout in the world dairy market, the drought has pushed up world prices by more than 20% in the past month or so.

Those increases will hit milk and other dairy product prices in the supermarket, too. Because Fonterra is such a big cheese in the market, what happens down on the farm in New Zealand affects both world prices and what we pay at the checkout. The good thing, though, is we all benefit from having an export sector (mostly) doing well.

On the other side, the need to slaughter animals because of a lack of feed will flood the meat market. That should reduce prices in the short term and probably cause a supply shortage further down the track – so there are swings and roundabouts.

On another topic, the debate over who is to “blame” for the Solid Energy losses continues. This is a reminder of why having shareholders other than the Government is so important.

The state-owned enterprise model, with the Government (of any stripe) as sole shareholder is fraught. Directors must look after the best interests of the company (which does not mean the shareholder), but when you only have one shareholder, those boundaries can blur.

As with any major screw-up, you can’t point the finger at just one party. In this case, blame can be apportioned to the chief executive, the board, the shareholder, the rapid crash in world prices, etc. Each contributed. Solid Energy will probably recover, hopefully wiser from a painful experience.

Remember, now-retired Solid Energy chairman John Palmer is the same person who has been at the helm of Air New Zealand during its renaissance.

So a tale of two companies: one doing exceptionally well and the other doing badly – at least for the moment. Commodity prices are cyclical and coal’s day will come again.

What if it was dairy prices that collapsed? Now that’s a scary thought.

Send questions to money@listener.co.nz

More by Linda Sanders

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One Response to “Creaming it”

  1. Greg76 Mar 31 2013, 12:22pm

    http://www.rfrate.com/?locale=en#!currencies - official exchange rates of currencies. Information provided by all the central banks
    Report Report

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