By Alex Tarrant
The high New Zealand dollar against its US and UK counterparts is seeing the wine industry increasingly export their wine in bulk and having further production work completed overseas instead of locally, a group representing growers says.
Despite sales holding up well, falling overseas input costs and a competitive Australian dollar exchange rate, the overall picture was an industry that had survived last year's glut now facing new headwinds of a high dollar against the currencies of two of its major markets.
NZ Winegrowers chairman Stuart Smith told interest.co.nz some wineries were choosing to use labour overseas to complete production due to a lower cost of doing so, meaning local jobs were being lost in the process.
Prime Minister John Key on Monday evening acknowledged some wine companies were choosing to import inputs such as bottles at the expense of local manufacturing, saying this was the dilemma faced by New Zealand because of the high dollar.
'We're sending them overseas'
Most of the wine industry's sales were in US dollars, UK pounds and Australian dollars, Smith told interest.co.nz.
"Of course the Australian dollar sales – they’re not bad at all, but the US dollars, it’s a big problem, and so are the pounds. We were selling not so long ago in the 30p’s [pence], and now we’re in the 50’s. It’s very difficult," Smith said.
However vineyards were making sales as the industry furiously marketed and found new ways to cut costs.
“We’re going along quite well [in terms of making sales], but we are actually exporting jobs [sending them overseas] now because wineries are looking to get their costs down by looking to add some of the value that should be added in New Zealand, added offshore because it’s cheaper,” Smith said.
“In some cases it’s buying inputs from offshore like liners and bottles and cartons and those sorts of things. But also some wineries are choosing to bottle offshore because it’s cheaper,” he said.
Wineries were choosing to sell in bulk out of New Zealand because of the currency.
“It goes out in a 20-foot container, which is filled with a large bladder, and they fill that up with wine rather than that going out as packaged wine. That’s becoming increasingly popular because it’s cheaper. Instead of sending 1,000 cases of wine in a 20-foot container, you can get 2,000 cases in bulk in a container,” Smith said.
Because wine sales were going well overseas, exporters would have the opportunity to increase prices.
“You would expect the law of supply and demand will come into play at some point, and will have an impact on price," Smith said.
"We’re maintaining in-market prices, but because we sell in foreign currencies, the return back here to New Zealand is getting smaller. So how all of that’s going to play out is difficult to say. I had anticipated that grape prices would likely increase next year, but with the dollar where it is, if it stays at this sort of level, that’s probably unlikely to happen,” he said.
'Input costs falling, but not enough'
The high New Zealand dollar did mean some input costs were falling, although not enough to mitigate reduced returns. The high dollar also meant it was cheaper to have work completed overseas.
“I would have thought New Zealand should be aiming to get as much value-added within its shores as possible, because that’s where the jobs are," Smith said.
"The health of the New Zealand economy – how it can be grown, and how we can all be better off is by having high-value jobs here in New Zealand. Otherwise we’re just going to be the place where the cows poo, and the milk goes offshore, and where we grow the grapes and the profit is effectively exported offshore,” he said.
In terms of factors influencing business decisions for whether to keep work in New Zealand, such as tax rates, the volatility in the New Zealand dollar was the number one factor.
“I don’t think we should get hung up on what the value [of the dollar] is. I’m not going to say the New Zealand dollar should be worth ‘x’ against the US dollar, and ‘x’ against the UK pound. What we’ve got to do is get a monetary policy that will enable the dollar to actually be at what its fair value is – what New Zealand’s economy is really worth,” Smith said.
“If the New Zealand dollar was at its fair value, it would be considerably lower than it is today, and if we had the correct monetary policy settings I don’t believe there would be the same level of volatility, and the dollar would be at a much fairer value,” he said.
'Target non-tradables inflation'
NZ Winegrowers had commissioned a report by economic research house Infometrics in late 2008, in which Infometrics noted that having monetary policy target exchange rate stability would likely be counter-productive, as gains in exchange rate stability were likely to be offset by increasing economic instability, as the operation of multiple goals undermined the efficiency and credibility of monetary policy.
Rather, the Infometrics report said exchange rate stability was likely to be better achieved through different implementation of monetary policy. Infometrics recommended that for this to happen, the Reserve Bank’s policy targets agreement should be simplified to target non-tradable inflation, as opposed to inflation overall.
“The rules only need a little bit of changing to make a significant difference to monetary policy, and a significant difference to New Zealand and New Zealanders. So manage the economy with the best interests of New Zealand in mind, rather than the best interests of Australian banks,” Smith said.
Smith said he thought the banks were “undoubtedly” putting pressure on the government to maintain the status quo as they had a vested interest in the having the dollar stay where it was.
What to do?
Smith said he was very much interested in economist Geoff Bertram’s ideas in a paper presented in July at a seminar in Parliament, which called on the government to require local banks to source more of their funding from New Zealand. See Bernard Hickey interview Bertram last month here.
“And one of the things government could and should consider doing is getting our foreign debt down as a country. Government debt is very low in world terms but it’s growing, but our overall debt is high – we’re up there with Greece in terms of total debt. The banks are the ones that have borrowed it,” Smith said.
'That's the dilemma we face'
At his post-cabinet press conference on Monday evening, Prime Minister John Key said Australia was a big market for New Zealand’s wine industry, which was positive in terms of the more competitive exchange rate with Australia.
“I think the good news part of the story for the wine industry is they seem to have got through the glut. So the issue now is about margin, as opposed to finding a market,” he said.
Key had heard of wine companies importing bottles rather than use ones made in New Zealand.
“Something where the higher exchange rate’s actually helped them because it becomes cheaper," he said.
He acknowledged that was not helping local manufacturing businesses.
“That’s the dilemma we face with a higher exchange rate,” Key said.