Fruitless foreign dealings cost pipfruit industry $67m

By PHILIPPA STEVENSON agricultural editor

A 10-year rollercoaster ride of foreign exchange dealings may have cost the apple industry at least $67 million.

Although there were good times during those years, the last of the bills for failed forex contracts are now hitting home, pitting apple suppliers into a battle with major exporter Enza. The clash is unlikely to produce any winners and has soured relations between the interdependent foes.

The Apple and Pear Marketing Board, a producer board known as Enza, did well out of its forex transactions for six years, using profits to bolster returns to growers to the tune of $131 million from 1993 to 1997.

But the policy, which assumed a rising New Zealand dollar, came crashing down, along with the dollar, in 1998. That year, transactions cost growers $76 million. In 1999, they paid a further $55 million out of their fruit returns for failed forex deals.

With things going so badly, the board reviewed its policy, stating in its September 1999 annual report that it would take forward cover for only a few months before the crop being marketed.

Then-chairman John McCliskie said in his annual review that under the new policy, "cover may only be taken out for the following season and then only in limited amounts, until there is more certainty regarding the season."

Many of the 1400 growers nationwide believed that last year, when the company applied a $25 million profit from the sale of Frucor Beverages to $17 million worth of forex losses, and an $8 million debt for the failed Omniport loading system at Napier, that they had paid all their dues.

The board was corporatised on April 1 last year, and growers became supplier shareholders.

Many, however, decided to take the money, not the bag, when corporate investors Guinness Peat Group and FR Partners barged through a loophole in the new company's constitution. They leased small orchards to qualify as Enza suppliers, went on a share-buying spree until they had 36 per cent of the company, took over as the company's directors and named GPG head Tony Gibbs as chairman.

Growers believe GPG and FR bought into the business as a package - its assets and liabilities, including forex losses.

Instead, this year they were told, as suppliers, that they were liable for a further $50 million, bringing total deductions from their fruit returns for a decade of forex transactions to $198 million. The figure includes a forecast $19 million which won't come to book until next year but which Enza, facing full deregulation from October, wants to extract from suppliers now.

Using Enza figures, offsetting losses against the gains of the early years, the bill for a decade of forex ups and downs could be around $67 million, or nearly $48,000 a grower.

But growers, whose numbers have dwindled from about 1400 to about 1100 as hard times forced many to exit the business, argue that they are not liable for the $50 million debt, or possibly only $8 million of it - the amount applied to Omniport debt. The rest, they say, is the responsibility of shareholders - growers who retained their shares, GPG and FR.

Now, the watchdog Apple and Pear Board has unearthed a new worm in the bruised and battered apple.

It suggested in a draft decision released last week that in February 2000 the former marketing board strayed from the bounds of prudent forex management, and in doing so breached a rule forbidding it to step outside its core, fruit trading business or expose shareholders and suppliers to more than minimal risk.

In attempting to mitigate losses of $28 million it instead risked a blowout of $91 million, a move the regulatory board said was "simply too great to be regarded as hedging expected returns."

A package of measures worked out with Citibank "contained sold call options that increased exposure rather than reduced risk and were therefore not a hedging instrument."

In February last year the marketing board had $177 million worth of forward exchange contracts covered by three contracts in German deutschmarks, British pounds and US dollars.

The package had Citibank issuing three forward exchange contracts that were equal and opposite to these three summary contracts, and entering four options contracts (see box). The cost to Citibank and the gain to the board of the three forward exchange contracts was $28 million, offset by the expected gain to Citibank on the options contracts.

In its annual report in September last year, Enza said the remaining forward exchange contracts represented a liability of $25 million and the options contracts a further $44 million - a total of $69 million.

The three members of the regulatory board who considered the issue provisionally found, in a two to one decision, that spreading losses as far as five years ahead breached the regulations.

They were unanimous that the Citibank package was a breach because it was so risky for suppliers.

Few industry people were keen to comment on the findings ahead of making their own submissions to the board, which they may do until 5 pm on Wednesday.

However, one commentator suggested it was crazy to use the put and call options when the board had so much money at stake.

A forex dealer, who did not wish to be named, said put and call options were not necessarily risky and formed part of a suite of alternatives for hedging foreign exchange risk.

"There are ways you can use them depending on whether they are meeting or covering the underlying risk. There are degrees of risk involved there."

Options



Border:

Head1: The options


Body1:

In entering the February 2000 options contracts, the Apple and Pear Marketing Board:

A. Sold NZD (New Zealand dollars) put/DEM (deutschmark) call @ 1.0350 for DEM60 million with expiry date of June 29, 2001, and DEM60 million with expiry date of June 28, 2002.

B. Bought $NZ put/DEM call @ 0.8000 for DEM60 million with expiry date of June 29, 2001, and DEM60 million for expiry date of June 28, 2002.

C. Sold NZD put/GBP (sterling) call @ 0.3350 for GBP26 million with expiry date of June 29, 2001, and @ 0.3375 for GBP26 million at expiry date of June 28, 2002.

D. Bought NZD put /GBP call @ 0.2450 for GBP 26 million with expiry date of June 29, 2001, and GBP 26 million with expiry date of June 28, 2002.

Using option contract C as an example, the effect was that if the spot NZD/GBP rate, which was then 0.3045, stayed below 0.3350 at June 29, 2001, then Citibank would call on the board to sell GBP at 0.3350 at a loss to the board. If, for example, the spot rate stayed at 0.3045, the loss would have been GBP26 million times (1/0.3045-1/0.3350) = $7.8 million. If the spot rate had risen above 0.3350, Citibank would not have exercised this option. A similar situation applies to June 28, 2002.

The effect of option D was that if the spot rate fell below 0.2450, the board would exercise this option to buy GBP at 0.2450. If the spot rate stayed above 0.2450, which was likely, the board would not exercise this option.

The effects of the first and second contracts were similar to the effects of the third and fourth respectively, but were in DEM.

* Source: Apple and Pear Board