KEY POINTS:
The economy faces more bad news this week, with dairy co-operative Fonterra widely expected to make a cut in its forecast payout that could see more than half a billion dollars sliced off farm incomes.
The forecast payout for this season is currently $6 per kg of milksolids,
down from an opening expectation of $7 per kg.
However, in December Fonterra chairman Henry van der Heyden warned that a continuing fall in international commodity prices, fluctuations in the New Zealand dollar, and the worsening effects of the global financial crisis meant a cut was increasingly likely.
Westpac economist Doug Steel was forecasting $5.50 per kg.
"Which is probably on the high side of estimates I think. [I'm] aware of others in the low fives," Steel said.
Based on last season's collection of 1.19 billion kg of milksolids a 50c cut would be worth about $595 million.
Fonterra's available payout last season was a record $7.90 per kg - of which 24c was held back to protect the balance sheet.
Westpac was forecasting an 8 per cent increase in production this season and so a $5.50 payout would mean about $2.5 billion less this season, equivalent to about 1.5 per cent of gross domestic product, Steel said.
The average world price for all dairy products had fallen from just over US$2800 a tonne at the time of Fonterra's last adjustment in November to more like US$2200 a tonne, Steel said.
"It's extremely uncertain, you could get dairy product prices bouncing upwards in the next few months," he said. "Likewise, you could get them falling further with the European subsidies now coming back on stream but at the same time we're seeing some flattening in product prices overseas in the last few weeks."
The European Union last week re-introduced export refunds for butter, cheese, whole and skimmed milk powder suspended since June 2007.
The average price of whole milk powder in Fonterra's online auction has dropped 54 per cent since July, while the ANZ Commodity Price Index for dairy products has fallen by about half since peaking in November 2007.
However, a $5.50 per kg payout would still be the second best on record, Steel said. "In perspective it's still a very good payout. A lot depends on the cost side of things and I think there will certainly be a squeeze on farmer cashflow, especially those that have entered the industry pretty recently."
Fonterra is having a board meeting today and any announcement is expected tomorrow.