KEY POINTS:
The New Zealand economy, already struggling in recession, has been given a rude shock by our biggest exporter, as Fonterra today slashed its forecast payout by 60c per kilo of milksolids - which means $714 million less coming into our economy.
Fonterra has cut its forecast payout from $6.60 per kilo to $6.00, following a 24 per cent drop in international dairy commodity prices over the past eight weeks.
Last season, Fonterra gave farmers their highest payout payment in 43 years, in inflation-adjusted terms.
It paid a record $7.90/kg, which added up to $9.3 billion for its 10,724 farmers - the equivalent of an average $867,213 for each of them.
Fonterra Chairman, Henry van der Heyden said today that declining prices across all commodities, including dairy, had been exacerbated in recent weeks by the global financial crisis.
"There is a great deal of uncertainty around the world, industry and trade activity is slowing down and all the forecasts are pointing to a global recession. We have seen a real tightening in consumer spending and dairy is not immune to this rapid deterioration in the global economy."
"We have kept conditions under close review and brought forward our forecast revision so farmers know exactly where they stand as they work through their budgets for next year. The message is for farmers to be cautious in their planning."
Dairy New Zealand, a research, development and advocacy organisation, is funded by dairy farmers through dairy levies. Dairy NZ economist David McCall said the payout will come as no surprise to most farmers.
McCall said the forecast is in-line with what farmers were expecting but the outlook in the medium to long-term future remains positive but there will be volatility along the way.
He said demand for dairy products in developing economies such as India and China will continue.
McCall said dairy farmers' debt and costs have risen with about $4.40 of the $6 milk solid payout going towards cash costs of the business and about $1.10 towards debt repayment.
He said the figures come from Dairy Base, a project that monitored 1200 farmers' key performance indicators last year.
"So while it still looks a reasonable payout, farmers are really going to have to have a look at the spending in their businesses," McCall said.
He said local rural township economies will feel the pinch.
"They're the first indicator. They're the first to go when things are going good and the first to feel it when things tighten up," McCall said.
Federated Farmers Dairy chairman Don Nicolson said with the international commodity market softening, the reduction in forecast was "good management" by Fonterra.
"It's a negative but not entirely unexpected," said Nicolson.
He said the forecast would push farmers to further tighten their belts after droughts and flooding affected regions around the country earlier this year.
"And they've had cost increases, that have been some of the highest in living memory, in fuel and fertiliser so the belts have been tightening for months," Nicolson said.
He said it should be remembered that the pay-out was still larger than historic averages.
Fonterra shareholders council chairman Blue Read agreed and said despite the $6 payout being the second best ever seen, it will still "be a bit of a shock".
He said the announcement would come as a big disappointment but no surprise to farmers who will hopefully be "taking care" in the current global financial crisis.
"What we're seeing in the world economy, I don't think there'd be many people alive who have seen anything like this and the next closest thing would be going back to the depression in the thirties so there's no model to work off," Read said.
He said farmers only get what's left at the end of the day.
"Costs of production, costs of manufacturing, cost of sales, cost of everything and what's left is the farmer's payout. We're at the end of the line and we're aware of that," Read said.
Fonterra company chief executive Andrew Ferrier said, given current conditions, demand was unlikely to recover by mid-2009 as initially expected.
"While the medium to long term outlook for dairy remains positive the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year."
Ferrier said that as the world economy retreated, commodity stocks were building and these would need to be cleared before prices improved.
"The market has not yet absorbed the surplus stocks from the US. In addition, stocks in the EU are building. This combination of excess stocks and weak demand has driven prices down rapidly. A rebalancing of the market is unlikely in the short term," he said.
The $6.00 per kgMS forecast comprises a Milk Price of $5.60 per kgMS, down 65 cents, and a Value Return forecast of 40 cents per kgMS, a five cent increase.
"While lower commodity prices will improve margins in some markets for our consumer brands businesses, we expect this to be offset by lower volumes as a result of lower consumer demand."
Ferrier said that while no agreement had been finalised around the sale of San Lu's assets, it seemed more likely that the proceeds of these assets would go to San Lu's liabilities. "As a result, it is increasingly likely that Fonterra will have to write off the balance of its investment and this had been taken into account in the latest payout forecast."
The price set for Fonterra's cooperative shares has since slumped by 18 per cent to $5.57/share, down by $1.22 from the 2007 season, driving down the total shareholder return - a key business indicator for farmers - by 13.4 per cent.
National Bank rural economist Kevin Wilson said the announcement would take "a wee bit of heat out of some rural economies".
"It depends where you are. If you were in a drought effected area last year and had a 20 per cent fall in production and you get a [payout] of $6 then the gross income effect is not a lot of difference, the net income effect might even be better because your costs are down and you don't have to buy as much feed.
"If you're in Southland or Canterbury and had a reasonable year last year, then it dents things a bit," Wilson said.
He said the forecast is unlikely to take many by surprise and most farmers have been cautious.
"The signals have been there for a while, when I say signals, Fonterra haven't said very much but if you follow various market indicators, Fonterra's monthly sales for instance have been down, or some commentators for instance have said the payout will be down further than the forecast for sometime," Wilson said.
Dairy commodity prices soared due to world economic growth, demand from emerging markets, reduced supply, drought in Australia and biofuel production.
However, Fonterra said international milk powder prices which peaked at about US$5000 ($9116) a tonne in late 2007 had fallen back to about US$2600 a tonne.
- EDWARD GAY/NZ HERALD/NZPA
