Richard Inder: A grain of truth hides in farming analogy

Act leader Rodney Hide this week asked us to imagine that New Zealand was a listed farm park as he declared appeals for cool heads on currency markets as "perverse".

It is a fertile analogy and Hide's view has a grain of truth, but only a grain.

The story goes something like this: On the fertile flats, the farmer grazes a dairy herd, while on the rolling hills and the steppes of the craggy back blocks, he grazes sheep and cattle.

The farm's staple income comes from selling cheese, butter and beef and sheep meat in Smithfield Market, the town on the opposite side of a deep lake that encircles the picturesque property. But it also makes a handsome income offering jetboat rides on the braided river that flow through the property to the lake, and from selling fish from farms on the shore front. (The title over the foreshore and lake bed was clearly set out in the title as the property of the farm.)

Shares in the farm surge, mostly amid enthusiasm for its high dividend. This is a legacy of the farm's sharemarket listing, when investors demanded quick distribution of profits to offset the risks of a venture that depended on undifferentiated commodities.

The chief executive decides the shares are over-valued. He goes to the farm's major investors and declares the dividend will not be sustained, that the shares do not reflect the farm's prospects and that they must fall. Investors would be wise to cash in.

Hide's implication is that the chief executive (the Labour Government) would be sacked. Shareholders would view such pronouncements as evidence that management lacked ambition. They would argue that, instead of bellyaching, the CEO should keep his mouth shut and use the highly-rated shares to make acquisitions that will position the company for the long term.

In one sense Hide is right. Michael Cullen and Alan Bollard's mission to Japan does send a poor signal to international markets. It tells them we are mainly a producer of undifferentiated commodities; that New Zealand is not a source of products that will, in the future, be the source of wealth: technology, media and science.

However, Hide's analogy is not entirely apt. The price of a company's shares has no bearing on the competitiveness of its products. Only if a company paid its employees with shares and offered them generous options would it make a start (and a small one at that) at approaching the awkward situation New Zealand now faces.

The country is mostly (and sadly) a producer of undifferentiated commodities. We should aim for a stronger currency over the longer term, but the kiwi dollar is renowned for its extreme cycles. This makes such a transition to a high-value economy all the more difficult.

The currency is hurting and Cullen and Bollard are right to ask for a robust analysis of our prospects.

Will it work? Probably not by itself. But it is a strong signal among a legion of indicators that our currency will eventually fall against its peers. Several more indicators, like straws on a camel's back, and the kiwi dollar could head back to fair value.

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Former chief executive Sam Magill's sale of his shares in Feltex last week should not inspire great confidence in the prospects for the troubled carpet company.

He can be forgiven the disposal on emotional grounds. The criticism of his leadership, from this columnist and others, as well as the behind-the-scenes manoeuvring at the company, are sure to have left a sour taste in his mouth.

He also may have just needed the cash.

But still, if there was anyone aware of the prospects for the company and the likely gains from a merger with Godfrey Hirst, it is Magill. It is fair to say, therefore, that Magill does not see a compelling case to hold on to Feltex's shares.

Meanwhile, Hirst's move is puzzling.

If it retains its ambitions to take over Feltex, it would be better to sit and wait quietly on the sidelines, bluffing the market that it is not interested. The shares would then have a greater chance of approaching a value that reflects the carpet-maker's prospects. Hirst could then enter talks on a stronger footing.

As it is, Hirst has set a floor underneath the share price. Its acquisition suggests it remains interested in the business. As a result, the shares will be driven by estimates for the prospect of a merged entity.

Such an action must raise questions over Hirst's judgment.