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Rising dollar hits rural company profits

Duncan Bridgeman

Friday 30th January 2004

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The strengthening Kiwi dollar is starting to bite the rural sector, with major companies reporting significant currency losses.

The country's largest company, Fonterra Co-operative Group, this week cited currency movements for a drop in revenues for the six months to November 30 of more than $650 million .

The dairy giant showed a 5.7% drop in operating revenue to $5.98 billion for the half year, largely due to a $361 million fall in sales revenue.

Chairman Henry van der Heyden said the negatives were offset by strong demand in international markets, improved commodity prices and stronger selling prices for ingredients.

The half-year accounts were not necessarily an indicator of the company's likely full-year performance, he said.

van der Heyden said the amount available for payout at November 30, 2003, was $2.2 billion million, $810 million higher than for the corresponding period the previous year. Fonterra increased its forecast payout by 20c to $4.15/kg of milksolids in December.

Last year the company changed its currency hedging to fully hedge earnings 15 months out against any change in the value of the kiwi against the US dollar. That was a change from hedging 30-70% of its earnings over 12 months and up to 30% over 13-24 months.

Fonterra's hedging strategy has an impact on farmers' payout, as when the New Zealand dollar rises, foreign earnings convert back at the lower, hedged rate.

Yesterday Carter Holt Harvey also reported a significant downside. Net sales were down 6% on last year, partly as a result of the strengthening Kiwi dollar.

However, the company said it had achieved effective hedge rates on its US dollar and Australian dollar exposures of about 43USc and 88Ac respectively. That brought net foreign currency gains after hedging benefits of $178 million for the year.

Meat company Richmond also announced a significant profit downgrade, blaming the high dollar and increased competition. It said difficult trading conditions meant profit expectations would be "significantly below" the $13 million previously forecast.

Affco chief executive officer Tony Eagan voiced his concern over the rapid rise of the New Zealand dollar at the company's annual meeting near Hamilton this week.

"The dollar is having a major impact on processors and rural New Zealand in general. The full impact of the current foreign exchange situation will become more evident in the coming months."

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