Fonterra payout tipped to fall below $5

Fonterra's payout for the new season could slip below $5 a kilogram of milk solids, analysts say.

The dairy giant will today take its first stab at forecasting the coming season and with it how many billions it will pump into the economy.

The world's biggest dairy exporter accounted for 25 per cent of national exports in the year to May 2008.

Westpac economist Doug Steel said it was by far the biggest goods exporter and a vital foreign exchange earner for the country.

"If dairy exports go down if the value of our products go down, then it effectively makes everyone poorer," Steel said. "The mechanism for that is the Kiwi dollar tends to fall if our export performance doesn't go well, so that would translate into the man on the street having to pay more for their imports."

Fonterra's forecast for the current season ending this month was $5.20 a kg of milk solids, which with production expected to grow by up to 5 per cent could be worth $6.5 billion.

Westpac was forecasting a $4.90 payout for the new season, with probably some downside risk because of the reintroduction of dairy export subsidies in the United States.

The action by the US Government to support its dairy industry followed the reintroduction of dairy export subsidies by the European Union in January.

Dairy farmers created traffic chaos in Berlin, blocked milk processing plants in France and protested at EU headquarters in Brussels yesterday, seeking more aid to stay in business as milk prices fall.

EU farm ministers later decided to allow member states to bring forward the payment of 70 per cent of direct aid to farmers from December to mid-October, hoping it will alleviate the financial difficulties.

On the international situation, Steel said: "I think they'll [Fonterra] be having a pretty good look at it and if nothing else it just creates another element of uncertainty in the whole process.

"When you have uncertainty it's probably wise to be a little bit more cautious.

"So maybe not so much that they think the payout will be lower because of this move [by the US] but because of the uncertainty, maybe they might see cause to just not go out as high as they might have."

National Bank rural economist Kevin Wilson was predicting $5.20 for the coming season, based on an exchange rate slightly lower than current levels.

"I haven't changed the view at the moment but [I'm] getting a bit nervous about it," Wilson said.

"We keep saying it [the exchange rate] should correct, it's out of line with fundamentals, but it's not moving."

Fonterra managing director of global trade Kelvin Wickham said it was hard to know what impact the US subsidies would have on global dairy prices.

"But you have to say it creates more uncertainty and if anything a depressing impact on price."

The exchange rate was a bigger issue, Wickham added.

Before a record available Fonterra payout of $7.90 in the 2007/08 season the 10-year average was $4.60 a kg.

Federated Farmers dairy chairman Lachlan McKenzie said there had been 10 years or more of excessive and ill-thought out Government expenditure and extra compliance costs.

"If we can get a $5 payout and wind back some of the cost, then it's a very good business to be in," McKenzie said.

NZX Agrifax's last prediction for the new season of $5 was under review.

DAIRY PAYOUT
* Fonterra will today forecast its new season payout to farmers.
* Westpac is forecasting a $4.90 payout for the new season.
* NZX Agrifax's $5 forecast is under review.
* National Bank is forecasting $5.20.
* Reintroduction of US export subsidies might make Fonterra more cautious.

- AP