Pound weakness batters exporters

Sales of New Zealand products such as lamb and wine in Britain are yielding lower returns in New Zealand dollar terms, reports Catherine Harris.

Exporters to Britain are in pain as a weakening pound sends the New Zealand dollar to its strongest levels in 30 years.

"It's certainly the highest since the float in 1985," said Mike Jones, a currency analyst with the BNZ.

The kiwi's long-term average against the pound is 39 pence, but on March 10 it hit 47.46p. It is the strongest cross rate since June 1979 when the kiwi was worth 50.54p, although analysts say there is no straight comparison because of the pre-float regime at that time.

The New Zealand dollar is also hovering on a two-year high against the euro, striking 0.5279 on Thursday night as worries persisted about Greece's debt problems.

Britain is New Zealand's biggest export market for lamb, and the second biggest for wine.

Export NZ Wellington director Daniel Farley estimated many wine producers had lost more than 20 per cent of their gross revenues over pre-crisis levels.

Wine Institute chief executive Philip Gregan said the strong cross rate had wiped "tens of millions of dollars" off the industry's books.

"It has gone from 0.35p to 0.46p at the moment – that's a big change."

Compounding the problem was a global wine glut and Britain's lacklustre recovery from the recession.

"Some people are looking at diverting product out of that market ... If they can, people are trying to generate price rises but it's very, very difficult in the current economic environment."

New Zealand sent $285 million worth of wine to Britain last year, 28 per cent of the export market by value and about a third by volume.

Not many producers had gone out of business but some were putting their vineyards "to sleep" for a year, Mr Gregan said.

"There's no planting going on at the moment."

Lamb farmers are also feeling the pinch, although this is being offset by a global shortage of sheepmeat.

At the country's largest sheep meat exporter, Alliance Meats in Invercargill, the exchange rate was a concern.

"The fundamentals from sheepmeat are good and prices in the market are strong, so it's a disappointing reality," said John Rabbitt, the marketing manager for Britain.

Alliance farmers were getting $90 a lamb when a year ago they might have got a return in the early $100s, he said. A more telling comparison is that 45.3 kilograms of lamb cuts at last February's exchange rate would have earned $287, $73 more than last month.

Rob Davison, of Meat and Wool New Zealand's Economic Service, said Britain took about 25 per cent of New Zealand's lamb exports with continental Europe close behind.

He said that ironically, demand for Kiwi lamb had risen as British farmers steered their product towards Europe to take advantage of the low pound against the euro.

Children's clothing firm Pumpkin Patch, which has 39 stores in Britain, said the exchange rate was not having much impact because the stores were just breaking even.

"But certainly once the British market is in a profit situation, yeah, we'd be more concerned about the exchange rate at that stage," chief financial officer Matthew Washington said. Pumpkin Patch imported and exported in a basket of currencies, which helped spread the risk. "Our biggest part of our business is in Australia, so obviously with the exchange rate to the kiwi-aussie rate in the A77c [range], we're quite happy about that."

A Fonterra spokesman said it sent mostly butter to Britain, but its receipts in sterling were "not significant" to its total revenue.

Wool Services International in Christchurch is New Zealand's largest wool exporter to Britain. It exports about 30 per cent of the national wool clip.

Marketing executive Malcolm Ching said the exchange rate made it more difficult to persuade British yarn factories to buy New Zealand wool when local wool was cheaper.

"We're still doing business but it's a long road to actually conclude something and I would suspect that overall it is impacting on the volumes being done out of New Zealand."

Because British yarn makers were already under stiff competition from China, they were being forced to push the boundaries. "But they can't substitute everything," Mr Ching said, noting that New Zealand crossbred wool was still important for volume and reliability.

Much of the pound's volatility is due to political uncertainty before Britain's upcoming elections.

Financial markets fear a minority or hung parliament would fail to reduce Britain's burgeoning budget deficit, needed to stave off a sovereign ratings downgrade.

New Zealand's trade commissioner for Britain and Ireland, Michelle Templer, said exporters may have to put up with the weak pound for a while.

"It is likely sterling will continue to experience some volatility in the leadup to an election as investors seek to understand where fiscal constraints will play out."

She said that in her experience, New Zealand exporters had become better in the last five years at managing exchange rate fluctuations.

Many New Zealand companies that she had had dealings with in Britain had a presence there "so there is a natural hedge, as in market costs are reduced due to the strength of the New Zealand dollar".

Kiwifruit exporter Zespri said the currency changes had made little difference to it because sales to Britain represented less than 1 per cent of its business.

"We buy our worldwide labels from England which we offset against our pound revenue. Therefore, Zespri's exposure to movement in the pound is minor," Zespri spokeswoman Megan Heffield said.

However, it is an ill wind that blows no good and the strong kiwi in Britain and Europe is enticing many Kiwis to go on holiday there.

Brent Thomas, retail director for House of Travel, said his company was anticipating a rebound this year and set a fairly aggressive budget, but that had already been exceeded by 30 per cent.

"Coming into 2010, we had some confidence there would be pent-up demand for long trips, particularly to places like Britain and Europe, and that's certainly proved to be the case.

"In fact, it's actually outstandingly strong."

Because people's money was going further, Mr Thomas said Kiwi travellers were either staying longer, upgrading accommodation or taking add-ons. More people were also going to the US and Canada.

The strong New Zealand dollar had also failed to deter European fans from booking tickets for the 2011 Rugby World Cup well ahead.

"The demand from particularly South Africa, Britain and France this early out is very, very strong. The tickets will sell out. People are going to come and I know I'm going to sound like a salesman but my real concern is New Zealanders could miss out."