Dip in milk payout may drag on for two years

Many dairy farmers - and the rest of the regional economies heavily dependent on New Zealand's biggest business - are theoretically flush with cash following Fonterra's second-biggest payout since its creation in 2001.

The "average" farmer who produced 86,850kg of milksolids in the past season will receive $398,641 in milk payments.

The payout is worth $5.3 billion to the nation, primarily spread over the dairy regions such as Waikato, Taranaki, Southland and Canterbury.

But - to mix the metaphors - dairy farmers are not counting their chickens. Fonterra has also repeated its warnings that the strong kiwi dollar will constrain next year's payout.

Instead of the 12,000 farmer shareholders receiving $4.59/kg - the payout for the 2004-2005 season - they are at present on notice for a payout of only $3.85/kg for the present season.

Fonterra is not due to update its forecast until September, after milk has started flowing and it can get a better handle on climate predictions for the summer and autumn.

But Tony Wharton, a Ministry of Agriculture and Forestry economist who analysed the dairy industry's prospects for the ministry's "situation and outlook" report last December and the update in May, says the relatively low payout may drag out over two years.

In his May update, Wharton said for this season, Fonterra's forecast of $3.85 for 2005-2006 could become $3.81/kg under a scenario involving a high exchange rate against the US dollar, where the spot rate was up around 69.9USc, and Fonterra's hedging at 65.6USc.

Under a low exchange rate scenario, a spot rate of 63.0USc, and a hedged rate of 62.4USc, it could rise to $4.55. In each case the average national dairy company payout would be 1c or 2c higher than the Fonterra figure, indicating the Westland and/or the Tatua co-operatives would be paying their farmers slightly more money.

But further out, Wharton said: "Now, I'd be saying $3.80 for Fonterra in 2006-2007, but after that we'll see prices go back over $4/kg."

He said $3.80 "might not be so hot" when compared with last week's confirmation of $4.59 for 2004-2005, but was not out of line with historical payments.

The average payout was forecast to fall in the seasons ending in 2006 and 2007, as international prices declined from their present levels and Fonterra had to face the delayed effects of a high exchange rate, under its policy of hedging foreign exchange required 15 months ahead.

But MAF expects the average payout will increase in the 2007-2008 season - despite lower prices - as Fonterra faces what is expected to be a lower hedged exchange rate.

In the dairy year to May 2008, the export value of all pastoral agriculture is projected by MAF to lift 16 per cent, from $11.7 billion last year to $13.5 billion, with dairy exports lifting 20 per cent as a result of higher volumes and higher prices for most products.

Over the same period, dairy products will rise from 49 per cent of total pastoral export value to 51 per cent.

The OECD recently predicted that as the growth of world dairy exports supplies slightly outpaced growth in import demand over the medium term, international prices would continue to fall further for some years.

- NZPA