By PHILIPPA STEVENSON agriculture editor
Fonterra is abandoning the foreign currency hedging policy which is expected to give it a $500 million win this year.
The mega dairy co-op has briefed farmer shareholders this week on the new, passive hedging policy it will start next month.
Despite the forecast $500 million hedging gain
this year - significantly offsetting a decline in revenue arising mainly from an appreciating NZ dollar - the company said dairy industry experience over many years showed hedging wins were offset by losses.
From next month it will each month put cover in place over 15 months ahead at the conversion rate available from the international currency market.
"We will not be trying to estimate where exchange rates will be in three, six or 15 months time," the company advised farmers.
It was neither feasible nor appropriate for Fonterra to "take a view" in determining its optimal hedging strategy since foreign currency hedging gave a neutral result over time.
"To protect our net earnings against the impact of a volatile NZ dollar we will be entering into forward contracts to sell US dollars and buy NZ dollars.
"This will mean that at the end of each month, our earnings for the next 15 months will be protected against any downside from a rise in the value of the NZ dollar against the US dollar."
Conversely, during the period the company would not get any upside from a fall in the value of the NZ dollar against the US dollar.
Fonterra shareholders deputy chairman Graeme Edwards welcomed the policy, but said farmers learning of it this week would need time to absorb the implications.
"Essentially the economic theory says that foreign exchange markets are well informed, therefore hedging is a zero sum game. The dairy industry's long-term performance would support that - over 16 years we've come out about square," he said.
Farmers, particularly those with large operations, had called for a clear forex policy to allow them to "do their own thing".
Westpac's general manager of business banking, Bruce McLachlan, said more responsibility was now on farmers to understand the volatility of foreign exchange, and the impact on farm income.
"The Fonterra policy change is positive in that it allows farmers the opportunity to work out what is the best option for managing their individual foreign exchange risk."
