Strong Swiss franc punches holes in cheese exports

[August 26, 2011]  AFFOLTERN IM EMMENTAL, Switzerland (AP) -- The Emmental Show Dairy has cranked out tons of cheese for years. But now it's in trouble -- production is down by a third and the company fears it may be forced to cut back to just a few wheels a day, enough to show tourists.

The dramatic slide in sales of Emmental, popularly known as "Swiss cheese" in North America, is caused by the strength of the Swiss franc, a financial phenomenon that is driving down profits in sectors across all of export-driven Switzerland.

Adrian Zehnder, the dairy's business manager, says the company is earning 5.49 Swiss francs ($6.92) per kilo, down from 7.80 francs per kilo last year. Most of the cheese is exported to Europe, mainly Italy.

"We are really coming close to our break-even point, which is around 5.30 francs. Then we really have to think about stopping our production," Zehnder said, on the rolling green hills in central Switzerland where cows graze within view of the snow-flecked Bernese Alps.

Swiss government officials are well aware of the problems that exporters like Zehnder's dairy are facing.

The country's currency is used by international investors as a safe haven in times of trouble. When global stock markets are volatile and vulnerable, as they have been lately, traders like to park their capital in Swiss money accounts.

On top of that, the Swiss economy has been doing better than many nations in Europe, where the debt crisis has shaken the financial sector and forced governments to cut spending.

As a result, the Swiss franc rallied from buying 76 euro cents in April to 97 euro cents in early August. On Thursday, it traded at 87 euro cents. Against the dollar, it rose from $1.02 at the start of the year to buy as much as $1.39 this summer.

"It's kind of a paradox. We have a situation where we are suffering because the Swiss economy is strong," government spokesman Andre Simonazzi said.

He declined, however, to consider the possibility that the franc could cause a contraction in Switzerland's economy. "We are not making plans and talking of recession."

The export-reliant economy is still chugging away at a healthy 2.4 percent growth rate. It exported 16.6 billion francs ($20.9 billion) worth of goods in July, up 3 percent on the month.

But the inexorable rise in the franc threatens to reverse the country's economic fortunes. Because of "the flight of the franc" hitting exports, the Swiss government says it now expects a slowdown in the nation's growth to 2.1 percent for 2011, and to 1.5 percent in 2012.

UniCredit Bank AG economist Alexander Koch wrote in a report that there's "already a probability of around 50 percent for a recession at the end of this year."

None of a series of recent measures by the Swiss National Bank and the country's governing Federal Council has put a dent in the franc's value. The government plans to inject $2 billion francs into the economy, which would have the effect of diluting the value of the franc.

But Koch said that is not nearly enough. Meanwhile, negative news from the eurozone debt crisis can drive the franc up any time.

"We therefore believe that an at least drastic slowdown of the Swiss economy is in the cards," he wrote. "Switzerland is on the brink of recession."

European neighbors -- struggling with massive national debts that have eroded confidence in their ability to repay their government debt -- are seeing a slide in consumer spending. Italians and Spaniards are buying less Swiss cheese and chocolate as public sector salaries are trimmed and pension pots shrunk.

Zehnder said cheese makers usually try to boost production to keep their income up when prices fall. But that's led to a glut of Emmental on the market these days, adding to the downward price pressure.

He would rather see the exchange rate fixed between the muscular franc and the battered euro -- a move that is increasingly gaining favor among policymakers.

"We will not shut down our company," he said of the 100-employee cheese-producing dairy, restaurant and store. "We would run the tourist and restaurant parts, but definitely we would think about dropping the production to zero, and we would go for three or four wheels a day, just for tourist purposes, and show the guests how Emmental used to be made."

[Associated Press; By JOHN HEILPRIN]

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Mark Carlson contributed to this report.

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