Prices to jump after record payout to dairy farmers

By Owen Hembry, Neal Wallace

Prices of milk and other dairy products are likely to rise as early as next week after yesterday's record Fonterra payout to farmers.

Goodman Fielder, which gets its milk from Fonterra and owns the Meadowfresh brand, said it was reviewing prices and would make a decision next week.

A Fonterra spokeswoman said it was too early for the company, which owns brands such as Mainland, to consider the effect of the payout on its product pricing.

Dairy product prices have soared this year as international prices reach record highs - good news for farmers and the economy but tough for household shoppers.

Last month, the price of butter rose 23 per cent, cheese 7 per cent and milk 3 per cent.

The Fonterra payout is expected to put more than $3 billion of extra cash into the economy.

The farmer co-operative raised its forecast payout for this season by 50c to $6.90 a kilogram of milksolids, an increase of 55 per cent on last season.

Based on last season's production, the payout would total $8.6 billion - a rise of $3 billion - but Fonterra chairman Henry van der Heyden said production was also up, so the total would be even higher.

The bonanza followed the last record forecast payout high in August, when Fonterra announced a figure of $6.40 a kilogram.

Yesterday's increase will add about $55,000 to the annual pay packet of a farmer with an average-sized, 320-cow dairy farm.

Overall, the increase on last season was expected to be about $250,000 for an average-sized dairy farm.

Experts say the payout is so big, and the industry so large, that its effect will be felt in the wider economy.

"If agriculture does well, the country does well," said ANZ National Bank rural economist Kevin Wilson.

He said the effect on the economy would not be immediate but would happen as the money was paid out over the next nine months.

"And the final effect relies on the actual production of the season, which we are only half way through."

Although farmers were likely to spend much of the windfall on repaying debt and upgrading equipment, retail sales figures out yesterday showed shop tills have started ringing in rural areas.

Retail sales in rural areas were up 7.3 per cent this year to the end of October, against a 1.3 per cent increase in urban regions.

Terms of trade this week showed export prices were rising faster than import prices "and that just means that New Zealand Inc is getting richer", said Mr Wilson.

Westpac economist Doug Steel said the move was a major stimulus to the whole economy.

He said it was likely to have contributed to the Reserve Bank's lifting of interest rates this year.

"I think the Reserve Bank's been well aware of the rise in spot prices overseas for some time," Mr Steel said.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said the increase was welcome news.

"Most farmers have had a few really tough years, and a heck of a lot went into this season with the highest overdraft levels they've ever had, and too many people forget that," he said.

"You could be forgiven for saying that farmers should take a little bit of this and spend a bit on themselves."

Fonterra Shareholders Council chairman Blue Read said the "one out of the box" forecast payout followed several lean years for dairy farmers and came as costs, including fuel, were skyrocketing.

"Fertiliser is almost doubling [in price], so there's a fair bit of pressure coming on."

- Owen Hembry and Martha McKenzie-Minifie

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