There's a lot riding on Fonterra's financial results due out on September 22. Not just for the co-operative's dairy farmer shareholders but also for the bankers whose informal hand-holding operation has seen the sector through a difficult two years.

Talk among bankers is that the NZ farming sector has displayed great resilience during the dairy commodity slump.

ANZ's Mark Hiddleston says it is similar to the kiwifruit disaster where the PSA virus decimated crops. But the kiwifruit industry is now back in a healthy position.

This underlying strength in NZ's farming sector helps farmers see through cyclical downturns and biosecurity issues.


But there are questions about when the wheel does turn, whether farm prices will appreciate or simply go sideways.

If it is the latter, this will force more fundamental change within farming to permanently embed the current focus on cash flows.

Right now Fonterra is in a "blackout".

Chief executive Theo Spierings cannot condition the market by giving too much detail, except to say he expects to show how the dairy company has created value.

"That's going to be quite a strong picture and strong message," he said in an interview for the Herald's Agribusiness report.

The co-operative gave a signal last week by increasing its 2016/17 forecast farmgate milk price by 50c to $4.75 per kgMS.

This means that when combined with the forecast earnings per share range for the 2017 financial year of 50c to 60c, the total payout available to farmers in the current season is forecast to be $5.25 to $5.35 before retentions.

Both Spierings and chairman John Wilson maintain the global milk price, while still at unrealistically low levels, is starting to improve as global demand and supply continue to rebalance.


Supply and demand is coming into balance again.

That confidence - laced with a good deal of caution - is shared by leading bankers.

A turnaround can't come quickly enough. The NZ economy has a major exposure to the dairy sector and the major debt that has been rolled up, from funding working capital and capitalising "losses", during nearly three years of low returns.

It's obvious that on current milk price forecasts, highly-leveraged dairy farmers won't be splashing out on new cars or beach houses in the near future.

Bankers suggest cost containment will remain a priority.

Those higher debt levels will have to be reduced as stressed farmers go into a consolidation phase.

After the Global Financial Crisis many New Zealand businesses had to cut their expense models to manage to their markets.

Ironically the dairy business provided a shield to the NZ economy at that time as milk powder prices escalated on the back of massive demand from China for "white gold".

NZ companies came through that period with improved balance sheets. But it took time and investment intentions were moderated.

There is an expectation that dairy sector volatility will continue.

As Westpac's Karen Silk says, farmers must reshape their capital position to accept that volatility will be part of their future world.

Silk points out farmers cannot carry a lot of financial risk in their operations at the same time global volatility impacts revenues.