Fonterra payout 'may go on debt servicing'

Federated Farmers have warned that today's higher Fonterra payout, while being a positive lift for the dairy industry, won't be any silver bullet for the entire rural economy.

And it also doesn't guarantee any heightened interest in a proposed Fonterra share offer to its farmers.

The dairy cooperative Fonterra this morning increased its projected 2009/10 payout by 95 cents to $6.05 per kg of milk solids, upping a September forecast of $5.10 per kg.

The latest rise to the forecast pay out will plough around $1.2 billion back into the economy.

The rural economy will not be getting a re-charge, says the farmer lobby group, because a lot of farmers will simply use the extra money to pay off debt.

Federated Farmers dairy chairman Lachlan McKenzie said farmers are having to deal with uncertainty as projected milk pay-outs remain volatile.

He said the range of pay-outs - between $4.50 and $7 in the space of two years - meant banks were less likely to lend to farmers with debt.

"The last two years have shown unprecedented swings and those have to be factored into the business," McKenzie said.

He said farmers were now spending $3 of every kg of milk solids on
running the farm - twice what it was 12 years ago.

McKenzie said that included wages, fertiliser and council rates which have doubled and are set to double again in the next ten years.

The Fonterra announcement may help save some very indebted dairy farmers and their financiers, says Bernard Hickey of interest.co.nz.

"This is particularly good news for South Canterbury Finance, which is trying to sell as much as NZ$500 million worth of dairy farms over the next year or so.

"It will also help bolster farm values and, more importantly from a bank point of view, the value of the loans underneath those farms."

Hickey expressed a lingering doubt, however.

"A key question though for any farmer or banker looking to rely on this forecast is how sustainable it might be. It is dependent on the currency staying off its highs and the global economy continuing to recover."

The Fonterra Shareholders' Council welcomed the co-operative's announcement today.

"Farmers will be both pleased and surprised at the significance of the increase", said Council Chairman Blue Read.

"The fluctuations in the forecast adjustments our farmers have been getting for their milk, particularly during the past two years, clearly demonstrate the volatility of the global market place.

"We look forward to the increase flowing through to farmers' cash flow.

"Receiving this news should help restore farmers' confidence that the food industry is one of the best to be in especially during depressed global economic times", said Read.

Read went on to say said the increased pay-out will enable more farmers to take up Fonterra shares.

But he stressed the "enable", saying farmers will be weighing up an investment in Fonterra against other potential investment ventures.

The first stage of the Fonterra's three-step capital restructure proposal is to offer farmer-shareholders the opportunity to buy 20 per cent more shares.

Unlike existing shares, the new shares will not be linked to how much milk a farmer supplies the cooperative.

- NZHERALD STAFF