Rule breach put $91m at risk

By PHILIPPA STEVENSON agricultural editor

Pipfruit marketer Enza's forerunner, the Apple and Pear Marketing Board, may have exposed growers to a $91 million loss through a complex web of foreign exchange deals.

Yesterday, industry watchdog, the Apple and Pear Board, provisionally found that in trying to mitigate a $28 million loss from forex contracts the marketing board left growers vulnerable to a further bill of $63 million.

The cost would have been deducted from suppliers' returns.

The regulatory body suggested the long-term option contracts entered into by the board with Citibank in February last year were outside its core, fruit export business, or in breach of a non-diversification rule.

It viewed within-season foreign exchange transactions for 2000 and 2001 as within the regulations.

It did not suggest any penalty for the alleged breaches, and will make a final ruling only after comments on its draft finding by Enza and other interested parties. They have until next Wednesday to make submissions.

Remedies open to the board include forcing the company to bear the costs of its actions, rather than growers.

Last night Enza welcomed vindication of forex management by its present board but said the watchdog's decision had further complicated a difficult and emotive issue.

"It adds complexity to any negotiation between Enza, Government and growers to achieve a speedy resolution."

The industry guardian's investigation follows a dispute between applegrowers and Enza over liability for a claimed $50 million in forex losses.

Questions have been raised about an apparent blowout in the losses and whether the company's actions related to fruit marketing, making them growers' business.

Enza has been deducting $4.50 per carton from growers' returns to cover the losses, some of which will not be racked up until next year.

The board also provisionally found that Enza's bringing back forecast forex losses for 2002 - possibly $19 million - did not breach the rules.

Describing the history of Enza's forex transactions, the board said the former marketing board started taking out forward exchange contracts in the early 1990s and, with the gains made, gradually increased the extent of cover as far as five years out.

The policy assumed a rising NZ dollar and stemmed from a desire to protect growers against the adverse consequences of that.

"In 1997 the NZD stopped rising, and the forward exchange cover then created losses on conversion," said the Apple and Pear Board.

The marketing board changed its policy but by December 1999 was aware of prospective losses of $40 million for 2000, and also knew a difficult apple season was likely. It worked with Citibank to negate the adverse impact of certain forex contracts that existed for the conversion of receipts relating to pipfruit sales in the 2000 season.

The strategy, supported by external advice, was for the contracts for 2001 to be left alone. Its purpose was to mitigate the effect of the losses on growers (as suppliers, not shareholders) in the 2000 season.

In January 2000, the board adopted an options strategy that took a third of the losses in 2000 and subsumed a third to 2001 and a third to 2002. The third falling in 2000 was not taken as a deduction from the fruit payments as in previous years, but was taken as a cost to shareholders, offsetting the capital profit from the sale of Frucor.

In February 2000, the board implemented the agreed options strategy with Citibank.

The regulator said the contract package contained sold call options that increased exposure rather than reduced risk and were therefore not a hedging instrument. They were therefore not necessary to the core business and...represent a breach [of the diversification rule]."