Owen Hembry: Odd times when even bad news is good

In any other year a 7.6 per cent drop in revenue at Fonterra would cause a wave of angst and recrimination but then this clearly is not any year.

The speed of the global recession left the world playing catch-up, demand waned and international dairy prices tumbled - losing more than half their value since peaking in late 2007.

Revenue for the six months ended January 31 of $8 billion was down 7.6 per cent on last year when adjusted for different reporting periods and including exchange hedging.

In this environment Fonterra described its result as solid, even good, and the reaction from farmer body Federated Farmers was congratulatory.

Dairy farmers' eyes will have been on the key driver of their own businesses - the payout.

The opening gambit for this season was a high $7 per kg of milksolids and the current estimate of $5.10 per kg is still historically high, but down more than 27 per cent from the start line.

Based on Fonterra's expectation for production to grow by up to 5 per cent this season to 1.25 billion kgs the cuts already made to the forecast payout could cost farmers about $2.37 billion.

Farmers who budgeted around the original forecast, even with a healthy dose of conservatism, will be feeling the pinch.

Farmers needed the payout to stabilise and Fonterra delivered, with chairman Henry van der Heyden making it clear the board was confident about the forecast.

However, van der Heyden says retaining some payout - as was done last season to protect the balance sheet - is not off the table but he was also clear that if assumptions about redemptions and new capital play out then farmers will get paid the $5.10 being forecast.

Having cut the forecast twice to $6 before January's slice to $5.10 Fonterra would not want to get caught out again and could have stirred in an extra portion of conservatism.

Better to under-promise and over-deliver so the old sales mantra goes.

The consensus is that tumbling dairy prices have reached a trough, albeit with the caveat about extreme global conditions.

Westpac economist Doug Steel says international commodity prices are close to the bottom.

"Or we may have even passed the bottom," Steel says. "It is extremely volatile still so you'll only know the bottom once you have passed it and coming out the other side."

Fonterra chief executive Andrew Ferrier says prices will bounce around, global supply has fallen back and demand is expected to start picking up during the next six months.

Reading between the lines it could be if $5.10 is all there is then farmers will get the lot with no retention, but if there's more in the kitty come the season's end the board could hold back payouts above $5.10.

Considering how far the forecast has been slashed farmers might well argue to share in any regained ground.

LIVE SHEEP EXPORTS

In 2003 more than 50,000 Australian sheep were left adrift at sea after being refused permission to unload in Saudi Arabia.

The headline-grabbing Cormo Express incident led to a voluntary moratorium in New Zealand on exports for slaughter and a Customs Export Prohibition Order in 2007 which gave the Ministry of Agriculture and Forestry the power to approve consignments on a case by case basis.

No one has made an application to export for slaughter since the order was put in place, although in 2007/08 livestock exports, mostly for breeding and excluding race horses, were worth $39 million.

But last week the issue shot back into the news.

Nothing particularly new happened - the prohibition order is still in place and Saudi Arabia is still negotiating to restart the live trade.

However, the mention of possibly exporting animals for slaughter triggered a flurry of debate, and rightly so because anything that could put our agricultural reputation at risk needs tight control.

New Zealand's total agricultural exports were worth $17.8 billion in 2007-08, while live sheep exports if restarted were not expected to be of large volume.

Agriculture Minister David Carter tried to cool concerns saying no exports would be allowed unless strict welfare standards were met and New Zealand's reputation as a responsible exporter is maintained.

"The fact is the export of livestock - sheep, cattle, deer and goats - for slaughter will remain prohibited unless New Zealand is totally satisfied that the highest animal welfare and animal safety standards are met," he says.

There was no set timetable to complete negotiations.

"It's been four years of negotiation so it hasn't been a rushed process and no reason to rush it now."

It will be a high bar for anyone to reach because however luxurious the shipping conditions are some consumers will always think shipping live animals is cruel and wrong and by association so to would be New Zealand. And consumers today are arguably more actively interested in the ethical background of their food choices than at the time of the Cormo Express incident in 2003.

The SPCA says Carter gave it assurances that to obtain approval any shipment of live sheep would be subject to an extremely tight, user-pays regulatory regime, with animal welfare checks at all stages of transportation, both on and off the water and at point of slaughter.

SPCA's national chief executive, Robyn Kippenberger, says: "In our view, these requirements will make the cost of exporting live sheep wholly uneconomic, effectively preventing any shipments from actually taking place.

"The society will nevertheless remain vigilant in opposing proposals for live export for-slaughter shipments to the Middle East or anywhere else."

Even with a high bar it would be a brave government that took the publicity gamble on images of sheep being loaded on to ships for slaughter overseas.

COME FLY WITH ME

Next time you pop down to the rural supply store to pick up a tractor, it might pay to take your Fly Buys card.

Fly Buys, which has 2.2 million cardholders, is expanding its presence in the agriculture sector with machinery supplier Case IH and fertiliser company Summit Quinphos.

Andy Symons, chief executive of Fly Buys operator Loyalty New Zealand, says the company is talking to others suppliers.

"We're keen to see many more in the programme and based on the feedback that we're getting from people already I see a lot of mileage for us to have a good collection of agri-participants in the programme across all sorts of different categories," Symons says.

Farmers can earn points on parts and servicing at a rate of 1 point for every $30 spent.