Dairy model 'broken': Landcorp boss

Fonterra has announced Fonterra Co-operative Support will add an additional 50 cents per shared-up kilogram of milksolids to support farmers this season. Photograph by Alan Gibson.

A $4.55 swing in the forecast milk price paid to farmers over two seasons shows there's something wrong with New Zealand's dairy model, which is centred around farmer-owned Fonterra Cooperative Group, and it needs to change, says Landcorp Farming chief executive Steve Carden.

Fonterra today slashed $1.40 from its forecast payout to farmers to $3.85 per kilogram of milk solids, below the 2015 season's $4.40/kgMS and less than half the record $8.40/kgMS paid in 2014.

A slump in global milk prices through the course of the year had markets primed for a reduced payout, and state-owned Landcorp, the country's biggest farmer, was pleased to lock in as much as it could at Fonterra's $5.25/kgMS guaranteed milk price for the current season.

Landcorp's Carden said the Wellington-based state-owned enterprise had been anticipating a weak revision for a while, so today's result wasn't a surprise.

"A swing from a record high payout to a record low payout in the space of two years tells me that our current dairy model is flawed," Carden said.

"It can't continue because it is very damaging to farmers and the supply chains they are producing for."

The slump in dairy prices spurred the Reserve Bank to start cutting interest in June as declining export receipts weigh on the nation's terms of trade, and analysts had expected Fonterra to come out with a forecast below $4/kgMS.

The New Zealand dollar rose almost quarter of a US cent on the news and recently traded at 65.57 US cents.

Fonterra increased its guidance for earnings per share to between 40 cents and 50 cents, ahead of the market's expectations of about 36 cents per share.

Units in the Fonterra Shareholders' Fund, which gives investors access to Fonterra's dividends, jumped 6 percent to $4.94 after the release.

Rickey Ward, NZ equities manager at JBWere in Auckland, said the units gained because of the upgrade in earnings outlook, which boosted the stock's dividend yield to above 6 percent.

"It starts to look like a really high-dividend stock with the upgrade - it's a bit of relief," Ward said.

The lower forecast payout didn't spill over to the wider stock market as it brought Fonterra in line with market expectations, he said.

Fonterra also announced plans to introduce a support scheme where it will spend an estimated $430 million in the first half of the season offering 50 cents per shared-up kilograms of milk solids to farmers in interest-free loans.

DairyNZ has estimated $5.70/kgMS is the industry average breakeven for most farmers, and the Reserve Bank has said about a quarter of farms are currently operating with negative cashflow.

Cameron Bagrie, chief economist at ANZ Bank New Zealand, said Fonterra has the capacity to absorb the loan scheme, but cutting investment to cover an operational shortfall wasn't a strategy they would want to pursue for an extended period.

"It is a temporary, quick fix. You have to be very careful with those levers to ensure your credit rating doesn't come under pressure," Bagrie said.

Landcorp's Carden said the industry is under "huge pressure" as they enter the busiest time of the year, and will need to be careful that any reductions in feed and stocking numbers don't come at the expense of animal welfare.

"It is good to see Fonterra offering support to those farmers who will struggle, although clearly it runs into some potential conflict with its non-producing shareholders," he said.