Maximising PayoutWednesday, Aug 15, 2001
The NZ Exchange rate is showing signs of climbing again back past the minor peak in January of 45cents
US to the $NZ. The pundits who claim that the $NZ is undervalued and should be in the range of
52-54 cents may be starting to feel vindicated but as is known, the ability to reliably predict an
exchange rate is a rare quality.
However, the NZ exchange rate over the past 18 months has been a significant contributor to the lift
in prices for dairy, meat and to a lesser extent wool. But one of the significant differences between
the main pastoral industries has been the way the dairy industry has managed with forward cover
the impact of exchange rate variation on their targeted payout levels.
The Dairy Board treasury has had a significant impact on payout as the exchange rate has declined over
the past 30 months. The effect has been to defer forward higher payout levels as the dollar declined
but also to defer forward payout reductions on a rising dollar.
The treasury’s forward purchase function is clearly quite sophisticated, albeit shrouded in a
bit of mystery and imprecise definition. The board as a major player on the exchange market is probably
having two effects. Firstly it is managing the industry cash flow into a smoother band of rises
and falls but secondly it is providing stability to the exchange market that would not be present
as it spreads it exchanging buying.
Last week an Agri-fax business report suggested that, based on the current state of world dairy commodity
prices and the current dairy industry hedging contracts on the dollar, the payout for 2001-2002
should hit $5.60 kg/ms. A pleasing prospect relative to this years payout but such a prospect
invites the question on the sensibility of the industry putting so mush emphasis on hedging industry
Although the hedging effect on last years payout has not been quantified it could be guessed that if
no hedging had been put in place the payout for last season could well have been in excess of $5.80
Forward purchasing is certainly unlikely to generate in the long run any more net payout and if errors
are made can cause lower average payouts. But the important issue of forward purchasing of exchange
relative to the way the dairy industry operates is that it has turned the original payout protection
objective into a relatively costly payout smoothing scheme.
The objective of a cooperative is to get the maximum payout for each season into the hands of the suppliers.
It would appear that that is not now happening and it is costing the farmers on a number
Firstly the cost to the average supplier of the deferral of the payout. Say 80,000kgs MS at 80 cents
totals $64,000. Secondly periods of declining exchange rates cause cost inflation, exampled by fuel
cost increases. And thirdly producers cannot be certain that the intervention in the exchange rate
is maximising payout.
It would be unfortunate if the dairy Board and its successors continue to expand the ‘granny knows
best role’ in payout smoothing management when their task is surely to maximise payout
in every year and pass market realisations on to the producers as quickly as possible.