Farmers 'won't go on spree' despite payout

Photo / Brett Phibbs

Cash-strapped Fonterra dairy farmers have been given a 13 per cent increase in their payout forecast for this season - a boost that will inject $700 million into the economy.

The dairy co-operative, on which most New Zealand milk producers rely for income, yesterday announced a 55c/kg of milksolids increase in its 2009-10 payout forecast to $5.10/kg.

For the average production farmer this meant a $65,450 increase in income this season with advances starting next month, said Fonterra.

The announcement - coming in tandem with positive current account data - caused the New Zealand dollar to spike sharply yesterday afternoon. The kiwi jumped by almost a cent and was trading at US71.65c by yesterday evening.

The current level of the New Zealand dollar had been fully factored into the new forecast, which shows a 60c increase to $4.60/kg in the milk price Fonterra expects to pay farmers this season, but a 5c dip in their value-added return to 50c/kg.

Economists and bankers were quick to warn that farmers would not be hitting the tractor stores or real estate offices on the back of the lift because many have high debt levels following a recession-driven payout slump. Farming leaders were equally quick to remind city people that farmers had not had a big cash windfall - on-farm bills, labour costs and debt had to be met out of the increased payout.

Fonterra shareholders' watchdog council chairman Blue Read said the average cost of dairy farming was $3.50-$4.50/kg. The $4.55/kg forecast with which Fonterra farmers had started this season meant they would have "barely broken even", he said.

The industry and market consensus was that the 55c lift would simply ease cashflow problems for many farmers and the strong currency remained the export enemy.

Fonterra, which will announce its final payout for the 2008-09 season and its latest annual financial results today, said the new forecast reflected a sustained improvement in commodity returns, a more positive outlook in international dairy markets and evidence of a firming demand trend.

"Whole milk powder prices have been leading the way, with the prices for other dairy commodities now all moving in the right direction," said chief executive Andrew Ferrier.

But continuing extreme price volatility made forecasting "challenging to say the least", he said.

BNZ chief economist Tony Alexander said the payout lift was the "first solid piece of good news" for dairy farmers for some time, especially in light of the rising currency and positive results from Fonterra's global wholemilk powder auctions involving only small volumes.

"It will go some way to mitigating the downturn in dairying regions, but dairy farmers had a big shock with the payout going down from $7.90 and they can see the currency is high, and frankly is going to go higher," Alexander said.

"So I don't think this is going to flow through to buying tractors or each other's farms. It's more that it gives some farmers slightly better cashflow. I would still take a general downbeat view on prime dairying regions around the country, especially as dairy farmers adjust to what even the Reserve Bank considers an excessive debt burden."

ANZ National Bank chief economist Cameron Bagrie said his team had expected a 30c/kg increase because of the demand trend, but the question was whether that demand reflected genuine recovery or the inventory cycle. He said the increase meant a $700 million boost for the economy but farmer debt was a "big issue".

ANZ National rural banking general manager Charlie Graham said the extra payout would relieve pressure on farmers' cashflows but would not be enough to save a small number from going out of business.

NZX Rural analyst Phil van Polanen was surprised by the extent of the payout lift and said Fonterra clearly had a good currency hedging policy to achieve it.

He believed if the international recovery continued the final season payout could reach $5.30 but if next month's Fonterra global auction average price fell on this month's, and the November auction price did not lift on October's, the co-operative would have "little room to move" on payout.

Fonterra's online auctions, started in July last year just as prices plummeted in response to the global recession, are becoming recognised as a global barometer of dairy trends.

THE NUMBERS

$5.10
Payout forecast per kg of milksolids for 2009-10, an increase of 55c.

$700m
The amount the payout rise will inject into the economy.

US71.65c
The level of the NZ dollar last night, boosted by the Fonterra announcement.