six to nine months it will stay down at these levels permanently. indeed, if our economy prospers, we should expect to see a gradual appreciation of the exchange rate over the long - term. perhaps farmers need to think about the exchange rate the way canterbury farmers think about rain. sooner or later, droughts are going to happen. consider what we call “ the real exchange rate ”. the real exchange rate is new zealand ’ s nominal exchange rate, adjusted by the difference between inflation in new zealand and inflation in our trading partners. this is more relevant to exporters than simply looking at the nominal exchange rate : clearly, if inflation within new zealand is markedly higher than that in our trading partners, even a falling exchange rate is of little help to exporters, while if our inflation is markedly lower than that in our trading partners, exporters can cope with an appreciating exchange rate. when the real exchange rate rises, or in other words when the nominal exchange rate rises by more than the difference between our inflation rate and that of our trading partners, exporters are put under real pressure. and vice versa. now have a look at graph 1. graph 1 nominal and ’ real ’ trade weighted exchange rate ( 1970 - march 1998 average equals 100 ) index index nominal twi foreign / domestic price level ’ real ’ exchange rate [UNK] the solid line is the nominal trade weighted index, in other words the nominal exchange rate. the dotted line shows the difference between inflation in new zealand and inflation in our trading partners. as you can see, over long periods of time, the nominal exchange rate tends to reflect the difference between our inflation rate and that of our trading partners : when our inflation was relatively high, our exchange rate tended to depreciate ; when our inflation was relatively low, our exchange rate tended to appreciate. of course, there have been divergences between the two lines, sometimes for periods of three or four years at a time, and that is illustrated by the dashed line, or real exchange rate. but over the whole period shown, nearly 30 years, there has been no persistent tendency for the real exchange rate to rise or fall, and that is true despite the fact that through the first half of the period the exchange rate was essentially pegged to the us dollar ( with periodic devaluations ) while for the last 13 years the currency has been floating. the dashed line - the real exchange rate - has fluctuated around a pretty flat trend - line

the last couple of years, while many observers are predicting some fall in land prices from current levels ). however, in the meantime, the entry costs of getting into farming are still too high, which excludes fresh blood and innovation. for example, why would anybody take seriously advice to improve the market acceptability of the meat they produce, or the wool they produce, if the real crop is selling the [UNK] property to the next guy? why would the pursuit of excellence, that this summit is promoting, have any relevance, if the primary goal is property speculation? the answer, ladies and gentlemen, is no reason at all. my worry is that, as the profitability of producing meat, and wool, and milk is gradually restored with a lower exchange rate, farmers will quickly capitalise that increased profitability into the price of land once more. if that happens, the profitability of farming will remain low indefinitely : farm - owners may have substantial wealth, but the rate of return on that wealth will remain very low. eventually, this process only ends when people refuse to invest in an industry where the rate of return is so low and the risks - of weather, disease, and markets - are so considerable, and put their money in the bank instead. farming doesn ’ t come to an end at that point : land prices fall to the point where the rate of return on farming seems attractive relative to the risk. [UNK]