A record New Zealand dollar pushed the central bank into its first confirmed currency intervention in six years. It’s also forcing the nation’s biggest exporters to innovate as the soaring kiwi squeezes returns.
Zespri International Ltd., the world’s biggest kiwifruit exporter, is urging growers to plant a more profitable, gold-fleshed variety that appeals to Chinese buyers. Clothing company Icebreaker Holdings Ltd. offers customers a “baa-code” so they can trace the wool in their hiking gear back to the farm raising the merino sheep it came from.
Unique products and New Zealand’s environmental purity have helped companies from dairy giant Fonterra Cooperative Group Ltd. to medical devices maker Fisher & Paykel Healthcare Corp. defy the local dollar’s 18 percent surge in the past three years. Exports in the year through March climbed 17 percent from three years earlier, boosting growth and preventing a cooling in currency gains that prompted Reserve Bank Governor Graeme Wheeler to say this week the central bank sold the kiwi.
“Exporters have held up better than most people would have imagined given where the currency has got to,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “If there was some real pain coming through and it was starting to nobble the economy, the currency would probably naturally correct.”
New Zealand’s gross domestic product expanded 1.5 percent in the fourth quarter from three months earlier, the fastest pace in three years. Employment rose 1.7 percent in the first quarter, beating the 0.8 percent median forecast of economists, according to a government report yesterday. Exports make up about 30 percent of the economy.
New Zealand’s dollar rose above 86 yen on April 11 and bought 86.76 U.S. cents that day, the highest since August 2011. The kiwi plunged on May 8 after Wheeler’s comments on intervention. It bought 83.76 cents at 4 p.m. in Wellington.
“As a central bank governor in a small open economy you have to be aware of the impact of the currency, and particularly of the impact of sustained deviation of the currency away from its longer term fundamentals,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. “The longer we stay at these levels the more you erode the ability of business to continue.”
Finance Minister Bill English in February likened currency intervention to being “out in the war zone with a peashooter” and describes the exchange rate gains as a headwind for rebalancing the economy toward exports.
“We simply don’t have the capacity and are not willing to take the risks of trying to pick a lower exchange rate when everyone else is trying to do the same thing,” he said today in a Bloomberg Television interview.
The RBNZ has “a mandate to conduct intervention where they believe it is going to have some impact,” he said. “I don’t think either they or we believe that they can pick an exchange rate and move to it.”
Instead, the government has tried to make exporters as competitive as possible by removing regulations, encouraging trade pacts that remove tariffs, and managing its finances so inflation and interest rates stay low. The central bank, which is independent, has kept the official cash rate at a record-low 2.5 percent since March 2011.
Zespri, which makes payments to growers based on its export sales, has cut supply chain costs by about NZ$30 million ($25.1 million) since 2008 while its currency hedging saved the company NZ$70 million last year, Chief Executive Officer Lain Jager said in an interview.
“Exchange rates at this level are very tough and it certainly puts a lot of pressure on margins, but it is still a sustainable business,” Jager said from his Mount Maunganui office. “Cross fingers, we will come back into a more sensible exchange rate environment eventually.”
More growers saw the sense in changing to the more profitable gold variety from the traditional green as the exchange rate rose, he said. Growers can expect a return of about NZ$100,000 a hectare from gold fruit compared to NZ$38,000 from green, albeit with more risks as the fruit is harder to grow and the vines are less resilient to disease.
Zespri and Fonterra, the world’s biggest dairy exporter, are among companies targeting China, which surpassed Australia as New Zealand’s biggest customer for a third straight month in March. Fonterra expects to offer infant formula made from New Zealand milk in some Chinese cities from mid-year, Chief Executive Office Theo Spierings said in March.
Zespri sent 12 million trays of kiwifruit to China last year from 4.5 million in 2008, making inroads in a nation which is the largest grower of the fruit, known locally as monkey peach, said Jager. The New Zealand product commands higher prices because of its quality and status, he said.
“We currently do not have enough supply to keep up with demand” in China, he said. “The wealth in the cities and the demand for food represents enormous future growth for us.”
New Zealand firms are benefiting from the quality of the food it delivers to China and elsewhere, said Catherine Beard, executive director of Export New Zealand, a Wellington-based business group that supports companies seeking overseas sales.
“Chinese consumers are concerned about eating good quality food, and are quite concerned about authenticity,” she said. “It’s not just clean and green, it’s the fact that we are not corrupt, so when we say we have good food quality controls its relied on.”
Shanghai police and food-safety officials raided a market in Minhang district last week and seized meat with “New Zealand Sliced Lamb” labels that didn’t provide details about ingredients, the official Xinhua News Agency reported May 5. That followed a May 2 statement by the Ministry of Public Security that authorities had busted a criminal operation found to have sold rat, fox and mink meat as mutton.
Wellington-based Icebreaker only uses wool from merino sheep raised on the slopes of New Zealand’s Southern Alps and insists suppliers follow certain animal husbandry methods. The New Zealand links are important as the company ships the wool to China where the garments are made.
“We’ve put a lot of effort into explaining the sustainability and environmental impact being managed within the supply chain,” David Anderson, an executive at the company, said in an interview.
Elsewhere in the Asia-Pacific region, Australia’s central cut its inflation outlook and reiterated its forecast for “below trend” growth this year, in its quarterly monetary policy statement. The Central Bank of Sri Lanka cut its benchmark interest rate a half a percentage point to 9 percent.
Hong Kong’s gross domestic product probably expanded 2.7 percent in the last quarter from a year earlier, economists surveyed by Bloomberg News predicted. Japan’s finance ministry said today the nation’s March current account surplus was 1.25 trillion yen ($12 billion).
Finance chiefs from the Group of Seven nations will gather in the U.K today to begin a two-day meeting. German exports probably increased from a month earlier in March while Italy’s factory output may have fallen from February, Bloomberg surveys showed.
Fisher & Paykel, a New Zealand designer and distributor of devices used to treat obstructive sleep apnea which earns about half its revenue in U.S. dollars, in February raised its full-year profit forecast, citing new products and operating efficiencies.
Such innovation is being repeated around the country as exporters look for ways to grow in spite of the currency pressure on them, said Peter Chrisp, chief executive at New Zealand Trade & Enterprise, a government agency that assists companies to break in to foreign markets.
“Problem solving is so deeply ingrained in our DNA it becomes a competitive advantage,” he said. “As we get this mass of cost pressure applied, what you find are companies lurching toward this deep creativity to develop new business models.”