Dollar trap for wine firms

PENNY WARDLE
Last updated 08:48 22/02/2013

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Wine companies big and small find a high New Zealand dollar hard to work with, says Winegrowers New Zealand advocacy and trade general manager John Barker.

The New Zealand dollar has been at historic highs against trading partners' currencies, and this causes difficulties for exporters such as Marlborough's wine producers.

The Marlborough Express reported earlier this week that Marlborough export businesses were under pressure because of the high dollar.

Dr Barker said the currency had two effects on prices.

Both the strength of the dollar and its relationship to other currencies were relevant.

"If a company is selling a wine at a particular price in a certain market, the higher the New Zealand dollar the greater the squeeze on its price," he said.

Companies had to either push the price up in that market, which could cause resistance, or accept less money for their wine.

A company might sign an contract to sell a wine into the United States at $20 a bottle while the NZ dollar was buying US75 cents, Dr Barker said.

If the NZ dollar lifted to 85c while the transaction was still active, the company might have to cover the difference. "There's a large proportion of profit gone."

In the past, the volatility of the NZ dollar had been a problem but at the moment the currency was reasonably stable although strong, he said.

The wine industry was increasingly global and shifting currencies could change industry behaviour, Dr Barker said.

For example, if the British pound were weak, a UK buyer might opt to import their wine bulk and have it bottled, capped and labelled in their country to avoid some currency effect.

"This pushes further processing offshore," Dr Barker said.

Hedging was an option available to wine companies to insulate the effect of currency rises and falls. This meant buying the right to purchase currency at a set price.

Sometimes companies lost money and sometimes they gained by hedging but the advantage was certainty during the term of the contract.

Hedging was not exclusive to big wine companies, Dr Barker said. The option was also open to smaller companies with access to expert advice, either inside or outside their business.

Some wine companies chose to sell in New Zealand dollars, which meant the buyer took the risk of the currency strengthening during the duration of the contract but gained if it fell, he said.

Others sold in US dollars, which reversed the risk.

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- Marlborough

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