Forum Archive Index - June 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Bill, 

I had a look at the thread

http://www.sharetrader.co.nz/topic.asp?TOPIC_ID=18399

The hedging policy for farm production is not an area I claim to have 
any special expertise in.   Hopefully if I start talking rubbish someone 
in the business can jump in and tell me where I am wrong.   But I will 
give you my view on the scenario, as outlined by the poster named 
"method".

The payout to farmers for a commodity product in New Zealand dollars 
depends on the price received for the goods in $US ( for that is the 
currency in which most of these commodities are traded) and the 
$NZ/$US exchange rate.

So far this year, any rise in the value of the $NZ, relative to the $US, 
has not had the impact many expected because farm commodity prices 
in $US terms are rising also.  For the purpose of this discussion let us 
assume that farm commodity prices stay right where they are now 
when measured in $US.

If Fronterra has hedged the currency fifteen months out, this means 
Fronterra can determine exactly what price the farmers will get over 
the next fifteen months for their output.  If the forecast payout is now 
$3.80/kg for the 2003-2004 season, the new hedging policy means this 
is *exactly* what farmers will get.  I don't understand the qualification 
the poster "method" makes when he states this:

'based on a 40% gross sales payout to suppliers'

I thought the $3.80 figure quoted was the amount shown in the cheque 
paid by Fronterra to the farmer per kilogram of milkfat?   Perhaps a 
farmer reader will correct me if I have this wrong.   

Once you have hedged the exchange rate, I had always understood  
that transactions occur at that hedged rate.   If the exchange rate goes 
up or down after the hedging is done, this makes absolutely no 
difference to anything.  This is what hedging does.  It removes any 
exchange rate uncertainty.    

Hedging where you have a product to sell is not gambling, as "method" 
seems to be saying.   From the farmers point of view it is removing the 
uncertainty about the price to be received, which will in turn give the 
farmer a message as to what costs they can afford to incur, without 
upsetting any banks

If the $US strengthens again which means that the $NZ buys only 
US45c again, then the farmers will be poorer than they would have 
been, had the hedging at 60c not been done.    This however, is 
spurious speculation, because once the hedging *is* done there is no 
way Fronterra or the farmer will be any better or worse off because of 
exchange rate movements.   Such a scenario is not a 'loss'  to farmers, 
as the hedging has eliminated exchange rate movements from the 
equation.  

"Method" says that $1NZ is US60c is a medium term high.   But that 
statement is just a guess.    No economist can predict exchange rate 
movements into the future with any certainty, so I wonder on what 
basis "method" thinks he can?

The only area I can see Fronterra becoming unstuck is if it decides to 
pay out more to farmers than the hedging policy allows, gambling that 
the exchange rate will go the other way so that they can recover the 
excess they paid to farmers back.    That is what happened to the old 
Apple and Pear board.    Surely Fronterra will have learnt by 
observation and wouldn't dare try anything like that.

I suppose technically Fronterra could withold some of the money they 
are guaranteed to be getting from farmers, and cause financial 
problems for farmers.  But since Fronterra is a co-op owned by the 
farmers I can't see that happening either.

Now if we reintroduce the possibility of the price of the commodity itself 
falling while the $NZ falls, that means that NZ Dairy farmer will be 
much worse off under this Fronterra new hedging policy over the next 
fifteen months.  This is because as the $NZ falls any hedged farmers 
will be locked in at the old (high) exchange rate.  This means there will 
be no associated $NZ price rise for milk fat, as a result of the NZ 
currency having collapsed in value.    This could be a problem if a 
dairy farmer is waiting solely for the $NZ to collapse in value so that he 
can become viable again.  But any dairy farmer running the farm solely 
on that premise, I would suggest is not the kind of farmer who is going 
to survive long term anyway.

SNOOPY

discl:   Not tempted to sell my WRI shares because of any of the 
above.






--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Stay on the upside of the downside, 
Anticipate the anticipation!"




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