By LIAM DANN
A report by BNZ chief economist Tony Alexander has sparked farmer fears that Fonterra's payouts may be headed to levels that could make dairying unsustainable.
Alexander has predicted that the high dollar could cause Fonterra's payout to fall as low as $2.50 a kg of milk solids for the
2005-2006 season.
That drop could prove to be an "unsustainable shock" for those farmers who had expanded and paid top dollar for land and animals, he says in his weekly economic outlook.
Fonterra expects to pay farmers $4.15 a kg of milk solids this season.
Mr Alexander predicts that due to rising currency costs the payout will fall to between $3 and $3.50 next season, then fall again to between $2.50 and $3 the following season.
Fonterra chief executive Andrew Ferrier urged farmers to remain calm and said predictions about what might happen two years from now were premature.
Simply looking at the impact of the currency was one-dimensional.
"We've given farmers a heads-up on this coming year, but you can only go so far," he said.
The company has warned that payouts are likely to fall next year, but will not release its first estimates for that season until next month.
Mr Alexander yesterday defended his figures.
"If the kiwi dollar was to sit at 70USc and not change for 12 months then for the 05-06 season they'll be locked in at around 67USc or 68USc," he said.
International dairy prices were already relatively strong so it was unlikely there would be much further upward movement.
"My intent in releasing these sort of numbers is so that dairy farmers are aware of where the risk lies.
"With any cycle people who buy late in the cycle get caught out when you get the inevitable correction the other way."
Dairy Farmers of New Zealand chairman Kevin Wooding said farmers were aware that the payout would go down next year and if the currency stayed high then the 2006 year could be very difficult. "We've just got to be really careful."
