Dec. 19 (Bloomberg) -- For 50 years, Alfred Spaltenstein and his family have grown Christmas trees at their farm outside of Zurich. Now the strong Swiss franc is threatening to spoil his festive spirit.
In the last two years, the currency traded almost 20 percent above its 10-year average against the euro. That made it even easier for tree growers from Germany and Denmark, who already benefit from lower operating costs at farms that produce in bulk quantities, to undercut prices in Switzerland.
“There’s huge competition,” Spaltenstein, 60, said in an interview at his farm nine miles outside of Zurich, where trucks are piled high with freshly chopped trees. “We are happy if we can more or less hold on to what we have.”
While Switzerland’s largest companies including Nestle SA, Roche Holding AG and ABB Ltd. have successfully managed to adapt to the franc’s gain because of foreign factories and sales, smaller manufacturers with local production are feeling the strain of a strong franc. The currency is poised to stay strong as economists predict the Swiss economy will continue to outpace the euro zone next year.
“We avoid the pure Swiss producers,” said Martin Lehmann, a portfolio manager at 3v Asset Management in Zurich, adding he always considers how much of a company’s production is Swiss-based before investing. “The franc will stay at these levels, or even test the 1.20 level versus the euro again. The euro crisis is not totally over yet.”
The currency has traded at 1.2178 per euro on average in the last two years, compared with the 10-year average of 1.4467 per euro. The franc this week appreciated to 1.22 per euro for the first time since May.
For Jan Jenisch, chief executive officer of construction chemicals maker Sika AG, the franc’s appreciation has made a sales target of 8 billion francs ($9 billion) by 2018 “look difficult.” Since that goal was set in 2010, the franc’s rise to record highs against the euro cut sales by 1 billion francs, he said in an interview on Nov. 13.
Lonza AG, a Swiss supplier to drug manufacturers Roche and Novartis AG, announced plans last year to cut 400 of 2,890 positions at a complex in the Alpine town of Visp, partly due to the franc’s gain and pressure from low-cost foreign rivals. Arbonia-Forster Holding AG, a Swiss maker of kitchens, windows and doors, said Oct. 30 it will examine all options for its kitchens unit amid prolonged pressure on pricing and margins from German imports to Switzerland.
The local central bank in 2011 introduced a 1.20-per-euro cap to halt a strengthening of the currency as investors sought haven assets amid the euro-area sovereign debt crisis. The central bank will maintain the cap for at least another year, according to a Bloomberg News survey of economists.
In June, analysts forecast the franc to weaken to 1.27 per euro in the first quarter of 2014, according to data compiled by Bloomberg. Since then, their expectations have changed and the latest prediction is for 1.24 per euro in that period.
Swissmem, an association of 290 local companies in the machinery, electronics and metal industries, said last month that orders for its members are still below the level of 2010, and only just started to notice an upswing in the third quarter.
The franc is “still high” and “downside risks still prevail,” central bank President Thomas Jordan said last week.
Local small- and mid-sized companies are especially under pressure because the country has the highest average monthly wages in Europe of $7,765.5.
“The franc is still very strong - in most of Europe you can produce everything cheaper because salaries are lower,” said Philipp Gut, head of the Swiss association of Christmas tree growers, IG Suisse Christbaum. Danish and German trees can be as much as 30 percent cheaper and make up about 60 percent of the 1 million trees sold in Switzerland every year, he said.
In Baden-Wuerttemberg, a federal German state bordering Switzerland, a top quality two-meter tree of the sought-after Nordmann Fir type costs about 40 to 50 euros ($54 to $67), and 32 euros for a lower quality tree, according to the region’s association for Christmas tree growers. IG Suisse and the Swiss forest owners association said Swiss Nordmann Firs sell for about 75 francs ($84).
Denmark has about 3,500 growers of Christmas trees and greenery and annual production is 12 million trees -- mostly Nordmann Firs for export, according to the Danish Christmas tree growers association. While Denmark is not part of the euro zone, the country’s krone currency is pegged to the euro.
As a result, Spaltenstein, whose 12-hour day tending his nine-hectare plot begins before 6 a.m. every morning in the peak business period before Christmas, is changing strategy. He now tries to distinguish his business with higher-quality trees and makes customers aware of the ecological benefits of local trees, compared to ones transported from far away.
“We’ve worked on it and invested so much,” Spaltenstein said. “The farm has to keep going.”
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