Value of dollar to affect wool auction prices

Press, 9 March 1987, Page 2

Value of dollar to affect wool auction prices

PA Wellington Wool exporters are becoming worried about the General Election’s effect on the value of the Kiwi dollar, said the New Zealand Council of Wool Exporters in its market preview.

All wool coming forward at auction for the rest of the season was likely to meet good demand, but auction prices would be strongly influenced by the value of the dollar and the intervention policies of the Wool Board.

During the last week there had been a marked recovery in overseas demand for New Zealand wool after some of the worst weeks of February trade. Considerable immediate and forward business had been written with the Soviet Union and China, while demand from various Asian markets was steady. That pattern of demand should continue to support the market at least until June, and would ensure good auction prices in the face of a steady decline in the amount of suitable wools going to auction. Mr Ky Tovgaard, of Bloch and Behrens, Christchurch, said forward selling of wool was dangerous for exporters at present, even though it was the main way New Zealand wool was sold.

The forward selling system meant the exporter took the risk on exchange rate and auction price changes. During normal times it was a good way of providing some price stability for both growers and overseas customers.

"Unfortunately, the risk element is now becoming extremely large. Each opinion poll which indicates that National may win the election and introduce a managed float, brings closer the day when we might see a flight of capital from New Zealand,” Mr Tovgaard

said. “Many exporters were predicting a marked drop in the New Zealand dollar because of this, but the size of the fall and its timing are unknown. Then, to complicate it further, we can only guess at the likely response of the Wool Board,” he said. Mr John Dransfield, of G. Modiano ,Ltd, Napier, said he expected the dollar to fall during winter. As the primary industry export year ended, exporters would reduce their purchases of New Zealand currency and this would coincide with profit-taking by overseas investors who did not want to take the risk of Muldoon-style intervention in the currency market, Mr Dransfield said. If the board continued its present policy of maintaining real prices for wool at auction, a fall in the dollar would result in a directly proportional increase in prices to farmers. However, exporters were uncertain if that policy would continue, as the board’s intervention at auction in recent weeks had not allowed for the auction price to ease despite a steady strengthening of the dollar, Mr Dransfield said. “I support the board’s policy of maintaining price margins between wool types at auction. But its mechanism for relating New Zealand dollar auction prices to prices in our major markets is another thing entirely,” said Mr Brian Spooner, of John Marshall and Company, Christchurch. “I do not think this mechanism is understood by exporters, nor by our overseas customers,” he said.

“This means it still leaves the big unknown of how the board will respond if the New Zealand dollar really falls out of bed.”

Mr Spooner said it was important for the board’s reaction to be as predictable and logical as possible, both to cut out risk for exporters and so that overseas customers believed they were being treated fairly.