Economical challenges continued
Figure 2 – Fonterra’s impact estimate of strengthening/weakening the NZD.
Fonterra believes that a 10% movement in the value of the New Zealand dollar against the key currencies is considered reasonably possible and quite likely, given the historical fluctuations in the value of the New Zealand dollar (Fonterra co-operative group limited, 2013). This can be verified by Figure 1. A 10% movement either way would result in the following post-tax (using appropriate tax rates) increase/(decrease) to equity and profit.
Table 1 - Best and Worst cases
While Fonterra was founded in 2001, the dairy industry in New Zealand has been exporting successfully overseas since the 1960s and growing since then (Warr, 1988). Over that time period the world economy has had many factors testing it, such as the financial crisis in 2008, wars in the Middle East, and terrorist threats – 9/11. Yet despite all of this, the world economy was upheld. Although the world economy is likely to undergo many more of these factors in 50 years, the way it reacted to the financial crisis shows that it can always bounce back. If the world economy is stable it would have a low impact on the butter exports, which is why this is a best case scenario.
The Global Dairy Trade price index has fallen 8.4% during the last Global trade auction on the 5th of August 2014 (Khan, 2014). More worrying is the fact that over the last year, dairy exports have been driven by solid growth in dairy prices while the production has remained static.
Conclusions:
Although the New Zealand dollar has been strengthening compared to the United States dollar since 2008, it is unlikely that it will appreciate to the extent where other countries cannot afford to import butter from New Zealand, because of this I would give it a 40 percent chance of this happening. However, if this were to happen, it is unlikely to have much of an impact due to Fonterra’s currency risks hedging policies for both transaction and translation. These policies limit the risks and exposure of foreign currency fluctuations (Fonterra, 2013). In other words, this means that even if the New Zealand dollar appreciates it will not have a huge impact on the dairy exports, including butter.
By Zoe Foreman
