Milk price cut will hurt townies too

Photo / Greg Bowker

Fonterra has slashed millions off farmers' payout for the coming dairy season in a move that will reverberate across towns and cities, analysts say.

Fonterra yesterday forecast a payout to farmers for the 2009/10 season of $4.55 per kg of milksolids, which based on the expected production for this season could be worth about $5.8 billion.

The forecast for the season just ending is $5.20 per kg.

The new season forecast was a potential cut of about $900 million on this season and a $3.5 billion drop on the record available payout in the 2007/08 year.

The forecast reflected low international dairy commodity prices and an assumed exchange rate of about US59c.

Chairman Henry van der Heyden said farmers were under severe financial pressure and the forecast was bad news for the country.

"Make no bones about it we spend a lot of time anguishing over it, we actually talk about it but at the end of the day we can only return what the market returns, which is commodity price plus currency."

Fonterra had been looking at a forecast above $5 when the dollar was at US50c but the company was now working with a dollar that was US10c higher, van der Heyden said.

Federated Farmers dairy chairman Lachlan McKenzie said the numbers were bleak.

"If you live in the city and think you're immune from this, think again," McKenzie said.

"It's a hell of a lot of money that isn't coming through the front door of the economy."

It was estimated to have cost $4.54 to produce one kilogram of milksolids during the 2006/07 season before a farmer made a profit, he said.

Fonterra chief executive Andrew Ferrier said the company was forecasting the currency for the new season and so there was a lot of potential movement in the forecast.

As a rule of thumb a 1c movement in the exchange rate realised over a year was equivalent to about 10c on the milk price payout.

International commodity dairy prices were bouncing around the bottom of the cycle. A significant uplift in prices was expected later in 2009 and into 2010, during which time demand was also expected to come back, Ferrier said.

National Bank rural economist Kevin Wilson said the bank would review its $5.20 forecast: "There is a difference between what we think the exchange rate should do and what's actually happening. We need to revisit that."

Spending by farmers flowed through the wider economy.

"You buy a machine, or you don't get something repaired, or you don't get the ditches cleaned or you don't paint the buildings - all those things that farmers spend money on impacts on other people's livelihoods," Wilson said.

NZX Agrifax head dairy sector analyst Susan Kilsby said she was confident that a $5.10 payout was possible.

"We're looking at where they'll end up at the end of the year, too, and obviously we're not surprised they've been a little bit more conservative to start the season given the volatile nature of both currency and commodity markets," Kilsby said.

Westpac economist Doug Steel said he was sticking to a $4.90 forecast.

Shareholders' Council chairman Blue Read said Fonterra's forecast was less than was liked but a clear signal.

"I'm certainly not going to budget on any more than they've budgeted on now but I'm still going to run my farm to best intent hoping like hell that it will go up," Read said.

Fonterra reaffirmed its forecast of $5.20 for the season ending and said any available payout above that level was likely to be retained. The fair value share - bought by farmers based on milk production - was valued at $4.52, down from $5.57 this season.