Payouts for dairy tipped to recover

The average price of whole milk powder in Fonterra's online auction has dropped 54 per cent since July. Photo / Supplied

The recession has helped slash dairy sector earnings but payouts will bounce back, analysts say.

Dairy giant Fonterra has progressively cut this season's forecast payout from $7 to $5.10 per kg of milksolids, compared with last season's record $7.90 payout, 24c of which was retained to protect the balance sheet.

Westpac is forecasting $5.10 this season and, in its quarterly Agribiz update yesterday, trimmed expectations for the 2009/10 season by 20c to $4.50.

Westpac economist Doug Steel said the difference between the $7.90 and $4.50 payout would be worth about $3.7 billion over the two years.

He said economic models were not working and it was hard to know what would happen next internationally.

"There's just so many big questions around that you don't even know the rules of the game let alone how it's going to be played."

However, the lower value dollar would help more in 2010/11 when Westpac expected the payout to recover to about $5.50.

"Given the backdrop of what's going on internationally to be even talking any number that's above average is quite an amazing feat and I think it speaks volumes for the economic framework that we have in New Zealand," Steel said.

The average payout during the 10 years prior to last year was $4.21 per kg of milksolids.

NZX Agrifax's forecast for this season was $5.05 at the mid-range point but was more bullish than Westpac further out with $5.10 to $5.30 next season and $6 to $6.30 in 2010/11.

NZX Agrifax head dairy sector analyst Susan Kilsby said the expectation for 2010/11 was based on an exchange rate in the mid-US50c range.

"Just in the last week, I've heard one economist saying we're heading to 40 and one saying we're heading back to 80."

NZX Agrifax had reduced its prediction for this season from $5.15 after the European Union re-introduced export subsidies in January.

"We were expecting the market to improve and it just took a wee bit longer to do that but there's been some signs in the last few weeks that the market has probably bottomed out."

The average price of whole milk powder increased 16.6 per cent in Fonterra's online auction last week, while the ANZ commodity index for dairy products dropped 5.6 per cent in February but stabilised during the second half of the month.

Expenses had increased in the past few years and the majority of spending by farmers tended to be in the spring when Fonterra had been forecasting a bigger payout, Kilsby said.

"They've gone and spent before they've been paid and that's where things get quite tough for them and also the advance payments have been delayed."

The situation probably held more implications for cash flow than overall balance sheets, Kilsby said.

"The ones that may have borrowed extremely heavily in the last season or bought [land and stock] at very high prices in the last couple of seasons will be feeling the pinch."