#Fonterra to Benefit From Direct Yuan-New Zealand Dollar #Trading

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New Zealand— Fonterra Co-Operative Group Ltd. FCG.NZ 0.00% unveiled a sharp fall in profits, the diary giant is set to benefit from a deal that allows direct trading of the dollar against the Chinese yuan.
 
Earlier this month Prime Minister and China’s Premier, Li Keqiang, announced making the dollar the sixth currency to be directly traded with the yuan. This will help Fonterra’s growing business in the world’s second-largest economy, Fonterra’s Chief Financial Officer told The Wall Street Journal on Wednesday.
 
New Zealand’s main export to China is whole milk powder but Fonterra also exports other dairy products, like cheese and specialty ingredients such as whey protein, to other food manufacturers, and it is set to benefit as Asians turn to higher-protein diets, thanks to growing affluence in the region.
 
China is New Zealand’s largest trading partner and the currency deal ends the need for New Zealand’s companies and currency traders to convert New Zealand dollars or yuan into U.S. dollars when making or receiving payments. Trade in goods between the two countries rose by 25% in 2013 to 18.2 billion New Zealand dollars (US$15.6 billion).
 
 
«Over time, it will have an effect on our transaction costs in our dealings with China, especially with our own operations as we import, export with our own subsidiaries there, so that will have a positive impact,» said Mr. Paravicini. The deal will also help grow trade between the two nations «and that will also be beneficial» for Fonterra, he said.
 
Fonterra’s exports were worth NZ$18.6 billion in the year to July 31, 2013, of which NZ$2.5 billion went to China.
 
China wants to promote the yuan, also known as the renminbi, as a global reserve currency. Roughly 12% of China’s foreign trade is currently settled in yuan, and expects this to rise to about 30% by 2015. China and Australia reached a similar deal last year and Gerard Field, HSBC’s New Zealand head of global markets in Auckland, said since direct trade between the Australian dollar and yuan began last April the value of transactions has jumped, rising to more than 3 billion Australian dollars (US$2.billion) in January from A$300 million in March 2013, according to Chinese data. He anticipates New Zealand will see a comparable jump.
 
Mr. Paravicini also said the dairy giant may look to tap the offshore yuan-bond or dim-sum bond market later this year to fund its operations in China.
 
«We have operations in and we have bigger plans for China, and to avoid unnecessary exposure risks we fund ourselves in renminbi,» he said.
 
In January, Fonterra sold its second dim-sum bond, raising 1.25 billion yuan (US$200 million) to finance its business in China.
 
«We constantly analyze our needs. I don’t think in the next few months you will see anything but probably toward the end of the year we will have to revisit our funding needs,» said.
 
Mr. Paravicini also remains confident in Fonterra’s position after Danone SA BN.FR +2.09% following a food scare last year.
 
The New Zealand dairy giant last might contain clostridium botulinum, a bacteria which can cause botulism. The food-safety scare—ultimately a false alarm—triggered a global recall of dairy products, including infant formula, across Asia.
 
Danone SA relied on Fonterra ingredients for its supply of baby formula in the rapidly-growing and highly-profitable Chinese market. Earlier this year it opted to take legal action via an international arbitration panel in Singapore and a high court in New Zealand, after it failed to reach a compensation agreement with Fonterra.
 
Danone wants Fonterra to compensate for a large portion of lost market share and sales, which it estimated 350 US$million).
 
However, Fonterra’s half financial Wednesday included an NZ$11 million provision for Danone which «is purely our legal obligation under the [supply] contract,» and added that there are no plans to increase it.
 
«We are very confident in our legal position and trust me that legal position has been tested by external people,» he said. «We will rigorously defend that position and at this stage we do not see any need to change that provision.»
 
The company announced Wednesday that net profit in the six months to Jan. 31 fell 53% on the year, as margins in its consumer and food service businesses were squeezed by higher dairy commodity prices.
 
Source: WSJ

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