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Surging NZ dollar brings hard times to local economy

New Zealand's economy was built on the sheep's back, but the surge of the local currency is nudging some in the industry to the brink.

Farmer Don Nicholson, 50, has farmed sheep since the early 1980s and seen some of the industry's biggest upheavals, including the removal of subsidies in 1985.

That slashed sheep numbers from nearly 70 million -- 20 for every New Zealander then -- to 40 million today.

`four good years'

It also caused hard times in the following years but the new lean and efficient industry had since seen some good -- if inconsistent -- returns.

"In my 24 years, I've only had four really good years -- around the turn of the century," Nicholson said.

"It's disappointing to find where we are in 2007," said Nicholson, who is also vice-president of the national farmers organization, Federated Farmers.

World lamb prices have fallen and the impact is much worse because of the high New Zealand dollar, which cuts export returns when they are converted back into the local currency.

In 2000 the kiwi hit a low of just below US$0.40. Apart from a decline last year, it has since risen relentlessly, hitting US$0.7658 late on Thursday, the highest level since flotation in 1985.

"The high currency means I have not reinvested in maintenance -- things like fencing and drainage -- nearly as much as I should have," Nicholson said.

shift

Nicholson has 2,000 breeding ewes near the city of Invercargill in the far south of New Zealand among some of the best pasture in the country. Many farmers in the region have been changing over to dairy, which is enjoying a boom due to fast growing world demand.

Lamb remains New Zealand's single largest export product and was worth NZ$2.3 billion dollars (US$1.74 billion) last year. But now it is just not paying for many farmers.

"Three or four years ago it cost 35 dollars to produce a lamb and you would get 60 dollars for it. Now it costs 45 to 50 dollars to produce a lamb and we only get 50 dollars," Nicholson said.

His plight is common among New Zealand exporters, apart from the dairy farmers. Fishermen, timber exporters, winemakers and manufacturers are all finding the going tough.

More manufacturers are moving production to cheaper centers in Asia. That has been a trend for years but for some, high interest rates and the strong New Zealand dollar are the final straw.

One of New Zealand's largest manufacturers, whiteware maker Fisher & Paykel Appliances said in April it was moving its laundry equipment manufacturing to Thailand with the loss of about 350 jobs.

Central bank Governor Alan Bollard is being blamed for both the high currency and high interest rates.

The Reserve Bank of New Zealand's mandate is to keep inflation within a 1 percent to 3 percent band and its basic tool is setting interest rates.

Bollard has steadily lifted rates to the highest level in the industrialized world of 8 percent to try to keep the lid on persistent inflationary pressures.

record highs

The high interest rates have sucked in foreign investors looking to cash in. In so-called carry trades, investors borrow in a low interest rate currency such as the yen and buy New Zealand dollar investments and the demand has pushed the dollar to record highs.

Aware of the damage to exporters, Bollard last week intervened in the currency market for the first time since the kiwi was floated in 1985. The central bank sold hundreds of millions of dollars, saying the kiwi was "exceptionally and unjustifiably high."

The currency dropped from about US$0.762 to approximately US$0.7525, but it has since regained most of the fall.

Critics of the central bank are asking why it has been given such a narrow focus on inflation, when the cure seems to be worse than the disease.

Foreign Minister Winston Peters, the leader of the minor parliamentary party New Zealand First, said the central bank's current policy was crippling exports.

He said his party would push for the legislation controlling the central bank to be changed so it would have to take into account the level of the dollar, exports and economic growth in setting interest rates.

"This is not a time for currency traders to exploit a failed policy to the detriment of our economy. It is a time for action," Peters said on Friday.
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