KEY POINTS:
Westland Milk Products has slashed its forecast payout to farmers in the face of a falling international dairy market but a Westpac economist says the fundamentals remain for higher prices longer term.
Westland's payout this season would be between $4.10 and $4.50 per kg/milk solids -
about $1 less than the payout announced a month ago of between $5.20 and $5.60/kg.
Dairy giant Fonterra last month cut its forecast payout to farmers by 60c to $6 per kg of milksolids.
Westland's performance last year was $8.29/kg, with $7.99 paid to farmers and 30c retained for capital investments and improvements.
Acting chief executive Hugh Little said this time last year prices were about US$4500 to US$5000 [a tonne] ($7850-$8723).
"While we fully believe that the market did overshoot, the prices have
fallen very rapidly and we're seeing prices of US$1700 to US$2000 [a
tonne] at this point in time," Little said.
"So we do think that the market's probably undershot now."
Westpac economist Doug Steel said in the next five to 10 years, once the
credit crisis had passed and normal growth returned, dairy prices were expected to be higher than in the past.
"Maybe to the tune of 25 per cent, whereas previously we might have
been thinking that new trend might have been a third higher," Steel said.
"So we've pulled back a little bit on that longer term trend but we still think the fundamental drivers are still in place even if the
short-term outlook is pretty nasty."
Federated Farmers West Coast dairy section chairwoman Katie Milne said the impact of the revised forecast would be felt throughout the West Coast.
Every dollar farmers earned on the West Coast generated about $7 in the
local economy. Farmers were already revising budgets and most were
chopping about 20 per cent.
Milne said many farmers were unimpressed with Westland directors awarding themselves a pay rise last month. It is understood the pay of
chairman Ross Scarlett rose from $71,000 to $92,000 and other directors received about 25 per cent more.
Even if it was deserved as a $500 million company, it isn't one any more, Milne said.
Scarlett said commodity prices and global demand had influenced the payout drop. Because of Westland's major investments in forward cover (hedging policy) it was unable to take advantage of the current
extremely favourable exchange rate.