Southern Hemisphere countries tackle exchange rate woes
Rising currencies in Southern Hemisphere fruit-producing countries battered growers and exporters in 2010 as much as any storm, causing lost profits and frustration.
Heading into 2011, some governments have taken action to drive down the value of their currencies, but whether these interventions will be effective is as yet unclear. Meanwhile, at least one grower/exporter has taken matters into its own hands.
Chile’s Central Bank announced in January it would buy US$12 billion to drive down its exchange rate with the U.S, which had reached about 465 Chilean pesos per dollar. The country prefers exchange rates of more than 500 pesos to the dollar for exports. Brazil and Peru took a different approach by increasing taxes on foreign investment to deter currency speculation.
Governments of other fruit-exporting countries in the Southern Hemisphere, such as Australia and New Zealand, have taken a more free-market approach and have not intervened to alter their currency exchange rates. On Feb 2. the Australian dollar was worth slightly more than the U.S. dollar, while New Zealand’s currency was 77 cents when it normally is valued at around 65 to 70 cents.
To calm the fluctuations, New Zealand kiwi exporter Zespri has a program that its Chief Financial Officer Mervyn Dallas says is aimed at “smoothing” the highs and lows, divided into two parts. Forward contracts lock in prices for future transactions. Options set a rate for a future transaction, but if terms later are more favorable then the option won’t be exercised.
Zespri is not immune to fluctuations, but the effect of the weak U.S. dollar “won’t be as significant as if we had no hedging whatsoever,” Dallas said.
Zespri credited its hedging with allowing it to give growers higher returns in the 2009-10 than in the season before, saying that average returns would have been NZ$0.85 lower per tray without the program.
“Like all businesses, we’re affected by the peaks and troughs of the currency,” Dallas said. “We try not to pick highs and lows. But when the U.S. dollar is strong, we might not get the full benefit.”
Two Southern Hemisphere economists concur that currency intervention is not likely to help fruit exporters much, but have different takes on what industry officials and governments should do.
Flavio Menezes, head of the School of Economics at the University of Queensland in Australia, called trying to manipulate the exchange rate “a blunt instrument” that is limited and could have negative consequences.
“There’s a lot of talk but in practice the ability to influence the exchange rate is quite limited. At best it’s a small effect and it’s temporary,” Menezes said.
Menezes said that fruit growers and exporters would come out better by concentrating on removing barriers such as quarantine requirements for crops, promotional campaigns and hedging. Latin America and Australia and New Zealand have different outlooks on the role of government, he said.
“In Australia, the U.S. and Scandinavia, people don’t wait for government,” said Menezes, who is from Brazil. “People in South America have an expectation that government should…solve the problem. But society has to help themselves.”
Francisco Arroyo, an economics professor at the Universidad de Chile in Santiago and director of the Innovation Center for Development, said that Chile’s plan to buy US $12 billion is “of little help and has no value for the long run,” and in fact may hurt Chile in the future in the form of inflation, loss of jobs and investment and social welfare spending.
“If that’s the signal that the authorities give exporters… then they will understand that they are left alone,” he said. They won’t invest a single penny more; they will consider going to Peru to do the same things. They can’t move the trees but they can move their knowledge.”
Arroyo advocates a government-backed insurance scheme that would shield growers and producers from big exchange rate fluctuations to preserve the fruit industry that he says provides 500,000 jobs throughout rural Chile. Receiving payment in dollars but having to pay workers in pesos (or local currency) no matter the value is unsustainable for growers, he said.
“In the long term, the government would lose US$200 million, but to keep alive 500,000 jobs, it is very inexpensive,” he said. “You have to give compensation to people who won’t survive flexible currency.”