Liam Dann: Low Fonterra payout stark reminder of fragility

The National Bank Business Outlook survey shows companies gearing up for what will likely be the end of the technical recession later this year.

But yesterday's payout forecast from Fonterra provided a stark reminder that the economic rebound will be short-lived unless our exporters are also part of it.

Right now Fonterra is hanging on like grim death to a forecast payout of $4.55 per kg of milksolids - a figure already so low it has the bankers breathing down the necks of many farmers.

Yesterday Fonterra announced that the high dollar had knocked 10c per kg off the milk price component of that forecast.

The dairy co-operative - which accounts for 27 per cent of the nation's export earnings - said it had managed to hold the $4.55 forecast by making gains on costs and through some uptick in the performance of its brands business.

But that news is hardly comforting. There is a limit to the gains that can be made on costs and the currency pressure is building every day.

In May, the $4.55 forecast was based on the New Zealand dollar averaging US59c. It has been trading above US60c since then and lately been above US65c. As the milking season heads towards its peak in October it is going to become impossible to hold the payout forecast unless the dollar falls.

Based on production estimates in May a $4.55 payout was worth about $5.8 billion to New Zealand in export earnings - a cut of about $900 million on the previous season and a $3.5 billion drop on the record payout in the 2007/08 year.

Compounding that, yesterday's announcement notes that milk production is now falling. The harsh winter and cost cutting by cash strapped farmers is curbing the total volume that the nation will export this year.

Unless something in the equation changes quickly it looks like the rural economy is heading into recession just as the urban economy is coming out.

For a country like New Zealand, which relies so heavily on agricultural exports, an urban consumption led recovery may be worse than no recovery at all.