Economical Challenges
Economic Challenges:
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Adverse movements in interest rates
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Stronger New Zealand dollar affecting exchange rates
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Inflation
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Inflation of New Zealand prices might be higher than other countries
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Unemployment
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Thus affecting the labour market producing butter
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Financial crisis which restricts expansion through lack of capital funding
Stronger New Zealand dollar affecting exchange rates
The biggest threat out of these economic challenges is a stronger New Zealand dollar affecting exchange rates, as this directly affects the amount of butter exported, and the revenue Fonterra would receive.
The level of exports is directly affected by the state of the world economy (Reserve Bank of New Zealand, n.d.) which is why it’s critical we consider how it fluctuates in order to see how it affects exporting butter from New Zealand. Based on the past 20 years the NZ dollar has fluctuated in relation to the USD. However, in the last 10 years the NZ dollar has strengthened considerably which reflects a “strong domestic economy, rising export commodity prices and associated increases in interest rates” according to the Reserve Bank of New Zealand.
Figure 1 – NZ dollar exchange rate & trade-weighted index - monthly average
The NZD/USD exchange rate should be interpreted as one NZ dollar buying x amount US dollars. The TWI (Trade weighted index) is the nominal NZ dollar exchange rate weighted 50/50 by New Zealand’s trade with its major trading partners and the nominal GDPs (in US dollars) of those countries.
In 2008 there was a global recession, which originated from a global financial crisis. As a result, the NZD fell sharply against the USD and other countries in the TWI. However, the NZD quickly bounced back and continue to strengthen against the USD and the TWI.
According to Statistics New Zealand (2013), the price of butter exports from 1992 to 2012 has only increased 2.9% whereas the volume of butter exported has increased a phenomenal 186%. Dairy prices rose almost 50% in 2007 – 2008, this double in price coincided with an expected fall in exports, but surprisingly it only fell by 17%. This shows that even though the appreciation of the New Zealand dollar is a threat, Fonterra should be able to combat it based on past events.
By Zoe Foreman
