Dairy farmers face flat payout

The rising dollar is making Fonterra cautious about its payout to farmers. Picture / Chris Skelton

That figure covers payment farmers receive for their milk, and a target of 45c/kg for value-added returns.

Value-added returns are earnings from branded consumer products and ingredients with a higher value than pure commodities such as milk powder.

Farmers will find out today if the $4.05/kg forecast has changed much, but a hint yesterday suggests this is unlikely.

Fonterra's dairy farmers' earnings forecast for this season is likely to remain flat, despite a hoped-for 80 per cent increase in the part of the payout relating to earnings from value-added business.

The co-op will today update its payout forecast of $4.05/kg of milk solids, made in July.

This includes 45c/kg in value-added returns from items such as branded consumer products and ingredients of higher value than pure commodities such as milk powder.

In a hint that today's update might not change those numbers much, Fonterra's chief financial officer, Guy Cowan, said yesterday recent gains in the dollar's value meant the co-op had to be cautious on payout.

It was committed to $4.05/kg, including 45c/kg for value added items.

However, it had to make sure that farmers knew significant changes in foreign exchange rates could affect the payout.

"But we don't alter our planning just for these short-term movements."

Last season, an initial forecast payout of $3.85/kg became a final figure of $4.10/kg.

A flat forecast today will disappoint farmers, who have been facing extra costs. Each 1c of payout equates to about $1000 in gross income for the average dairy farmer. A final payout of $4.05/kg would be the lowest since 2002-03.

Today's update will, for the first time, split the forecast into a price for milk, and returns from value-added activities.

The value-added component is forecast to be the 45c/kg of milk solids referred to by Cowan. Last season's figure was 25c/kg.

Cowan said the co-op's targeted 80 per cent lift in the value-added component reflected factors such as cost reductions, and an expected increase in returns from branded products and higher-value ingredients.

And if value-added product prices did not change, weaker commodity prices would help lift value-added by increasing the margin over the commodity input.

Cowan said about a third of the target value-added increase related to cost-savings, just under a third to extra branded product earnings, and a third to higher-value ingredients.

Asked why the $4.05/kg forecast was down 5c/kg on last season's final figure, despite the expected better value-added performance, he said the estimate took into account currency and commodity price expectations.

Fonterra expected commodity prices to fall.

Cowan said a change to the way Fonterra measured value-added would have practical benefits for the co-op.

The change - based on a new milk price model incorporating Fonterra's forecasts of commodity prices and foreign exchange movements - is expected to produce a result today broadly in line with the one that came up with the 45c/kg forecast for this season.

Cowan said the new measure would be more consistent and would make clear to farmers what they could expect from milk returns, and from the capital they had tied up in Fonterra.

Publishing a value-added forecast in advance would also help management focus on making sure targets were achieved.

"Once we go out and commit to delivering the value-add return, it becomes a much more important component of forecast and delivery," he said.

Dairy Farmers of New Zealand chairman Frank Brenmuhl agreed farmers wanted a consistent measure of value-added, but were more concerned about overall earnings.

"Most of the dairy farmers I've talked to say 'just get on and improve the damned payout ... as long as the big number's up there, we're going to be more pleased'."

If the value-added measurement formula changed too often "it becomes bloody meaningless", Brenmuhl said.

Fonterra Shareholders Council chairman John Monaghan believed the new measure would improvethe consistency of value-added reporting, and would help eliminate confusion over the two value-added measures that had been reported previously.