Fonterra eyes US dollar payout

The move, although seen as logical, would add complexity to farmers’ budgets. Picture / Greg Bowker

Fonterra is considering paying its farmers in American dollars.

The Herald understands that a move to US dollar accounting is one of the options being investigated as Fonterra reviews policy before adopting new international financial reporting standards (IFRS) next year.

Fonterra earns most of its $12 billion revenue in US currency but must transfer that back to local currency to pay its farmers.

A move to deal exclusively in US dollars - which is also being considered by forestry company Tenon - would allow Fonterra to avoid the hedging and transaction costs associated with dealing in two different currencies.

It would provide more stability for farmer pay-outs, which fluctuate dramatically as the New Zealand dollar rises and falls.

However, the change would shift the risk associated with currency fluctuation back to farmers who would still need to convert pay-outs for their living costs.

A Fonterra source said management would weigh up the overall benefit to farmer shareholders before any shift was made.

The source said it was possible farmers could shift their debt offshore into US dollars as a way to reduce their need for New Zealand dollars.

Fonterra accounts for 20 per cent of the country's export earnings. If it switched its payments to US currency, it would have a multi-billion-dollar impact on the economy.

Westpac senior currency strategist Johnathan Bayley said it was a logical move but it would add complexity to farmers' budgets.

He said the net effect of the move would probably be to lower the value of the New Zealand dollar.

The country has a large current account deficit - which means it is a net seller of New Zealand dollars. Bayley said if a significant chunk of New Zealand dollar buying done by exporters such as Fonterra and Tenon was removed, the deficit would create even more downward pressure on the currency.

But the move would expose farmers to new risks on the volatility of the New Zealand dollar and they might have to hedge against that risk to ensure their costs remained constant.

Dairy Farmers of New Zealand chairman Kevin Wooding said most farmers would not be opposed in principle to the idea of getting paid in US dollars.

"If there was financial advantage, we wouldn't worry too much at all."

But, if it was just a way of solving some of Fonterra's internal problems, they would not be so keen.

There was a question of whether farmers had the time and the expertise to hedge all their own currency risks.

ASB chief economist Anthony Byett said the move would not necessarily have a big effect on the wider economy.

Switching their mortgages to US dollar debt could make sense for a lot of farmers.

* Corporations around the world are aligning themselves to US accounting standards by adopting International Financial Reporting Standards (IFRS). New Zealand companies are expected to make the shift by January 1, 2007. The standards will replace New Zealand Generally Accepted Accounting Principles for companies with more than 50 staff or annual revenue of $20 million and assets of $10 million.