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Fonterra cuts milk payout forecast to NZ$5.10/kg (update 3)
January 28th, 2009
In another blow for the economic outlook for 2009, Fonterra has cut its forecast for its milk payout for the current 08/09 season to NZ$5.10/kg of milk solids, which is down from last season’s NZ$7.66/kg and the NZ$6.00/kg previously forecast by Fonterra last year. (Update 3 to include reaction from Federated Farmers.)
The dairy giant also announced that it would not be making its April Value Return payment to farmers, deferring it until the payout is finalised in October.
Dairy commodity prices have almost halved in the last year and the fall in the New Zealand dollar to around 53 USc has not been enough to blunt the impact. Demand from emerging economies is drying up and both the United States and Europe are about to resume subsidies for dairy farmers. Supply in Latin America, New Zealand and Australia has also grown.
Each 1 cent cut in the payout costs farmers NZ$12 million so this reduction will reduce dairy incomes by at least NZ$3 billion this year.
The result was slightly worse than the NZ$5.20 median forecast in our survey of economists, who had forecast a payout of between NZ$5.00/kg and NZ$5.50/kg.
This increases the chances of a big cut in the Official Cash Rate tomorrow as the Reserve Bank struggles to revive spending and demand in the economy while export returns slide.
The forecast figure of NZ$5.10 comprised of NZ$4.65 in milk price and 45c in Value Return (VR). Fonterra announced that it would defer its April VR payment until October when the final payout is finalised. Previously the VR had been paid to farmers twice-yearly.
“The Board is conscious that this is going to have an impact on farmers’ cashflows,” Fonterra Chairman Henry van der Heyden said.
“But we need to be prudent given ongoing market uncertainty and the need to maintain a strong balance sheet. For this same reason the Board is reserving its position on retentions. The level of redemptions for next season will be a big determining factor,” van der Hayden said.
He added that farmers did not need to worry about not being paid on October 20 and that Fonterra’s balance sheet was very strong.
Federated Farmers chairman Lachlan McKenzie said that with Fonterra delaying the value return component, farmers were effectively bankrolling Fonterra for six months.
“The second unpleasant surprise comes with incremental payouts being delayed until the end of the season in June,” McKenzie said.
“Each month, dairy farmers receive a baseline payout of NZ$4.05 with an increment on top of moving towards the final payout. This increment would have formed part of farmer budgets but this has been pushed back into June onwards,” he said.
“The interest costs for farmers bankrolling Fonterra will mean the effective payout in the hand for farmers will be less than the NZ$5.10 figure estimated.”
“This is not just unprecedented, it will require some farmers to immediately call their banks to arrange or extend overdraft facilities. This will impact the economy at many levels.”
Speaking on Fonterra’s Sky Digital channel alongside van der Hayden, CEO Andrew Ferrier talked down accusations that Fonterra’s globalDairy Trade internet auctions led to price declines for dairy commodities.
“It’s absolute nonsense,” Ferrier said, adding “we are very happy with the way globalDairy Trade is operating.”
“It is meeting the targets we set…the exchange is working along the lines we designed it to do,” he said.
Looking forward, Ferrier said Fonterra’s outlook was that the dairy industry was in for a tough time over the next 12-18 months, with the announced reintroduction of export subsidies by the EU.
Tags: Cash Rate, cent, Europe, Fonterra, Henry van der Heyden, Milk Payout, NZD, OCR, RBNZ, United States
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January 28th, 2009 at 12:40 pm
So, with 6 months of the season still to go:
1. $5.10 predicted payout, but with no indication of what future commodity prices that is based on.
2. $280 million of payout delayed from April to October.
3. Redemptions possibly a problem (which will require retension of more payout).
To me it looks like Fonterra is still putting the best possible spin on things. Debt and leadership are clearly still problems, and a high level of redemptions is a certainty. Further falls in commodity prices are probable, but I think unaccounted for.
I presume we will have to wait for the interim accounts to the end of January to find out more.
January 28th, 2009 at 1:00 pm
We must not forget the payout forecast it is only an optimistic punt……
I also wonder if the Chinese attempts to put more blame on Fonterra is connected to more melamine compensation claims….they have loaded more compensation on the already bankrupted unsantary loo…..
January 28th, 2009 at 1:29 pm
So the payout has only been higher once in the history of Fonterra?
January 28th, 2009 at 1:41 pm
Agreed Sam – what’s all the fuss – looking at that chart above $5.10 is not that bad. It could be argued that we are back to normal and the $7.66 was just a blip or a bonus year for the industry. $5.10 is the second best payout in the last 7 years.
So don’t panic – just a year when the farmer will not be buying a new car or tractor. Big deal!
January 28th, 2009 at 2:03 pm
Yes nothing to fuss about really.
Just $3.2 billion less into the economy than last year (equivalent to roughly 1.5% of GDP – and thats just directly). And of course last year was such a strong year for the economy to begin with wasn’t it? (oops silly me I just checked – 3 quarters of confirmed economic contraction with a 4th of the slipway). We didn’t need that $3.2 billion again this year did we? No, not at all, what with all our trading partners going gangbusters and the world economy looking so strong, pah its just chickenfeed (or should that be cattlefeed?).
Yep absolutely nothing to see here, just a few less cars bought thats all………….
January 28th, 2009 at 2:14 pm
Sam, Lara,
1. Todays announcement is the third drop in predicted payout so far this year those being 40, 60 and 90 cents, and it won’t be the last.
2. Fonterra paid out $5.33 in 01/02.
3. You need to take inflation into account comparing historic payouts
While you may not be affected, agricultural prices have impacts way beyond farmers.
January 28th, 2009 at 2:20 pm
The NBR has it about right in its coverage:
Opens with – “Fonterra has confirmed this country’s worst fears – the global financial crisis is wreaking havoc on the lifeblood of the economy”.
http://www.nbr.co.nz/article/financial-crisis-hits-home-fonterra-slashes-farm-incomes-39945
Put another way the removal of the $3.2B has just negated a substantial part of the planned government tax cuts
January 28th, 2009 at 4:28 pm
The whole Fonterra Board of Directors and Andrew Ferrier should be loaded onto a Hercules and given a one-way trip to China. A bit of People’s justice is required here.
January 28th, 2009 at 4:36 pm
Yes but $7.66 was an exceptionally high payout so it could be argued that farmers are to blame for excess spending in 2007/2008, mortgage borrowing to buy more farms and do more conversions was rampant even late in 2008 so they need a reality check.
January 28th, 2009 at 5:06 pm
Lara – How much of it was done on the ever so ensuring advice from farm advisers that were just handing their clients the phone numbers of the finance companies that were paying them the largest commission.
The law of the jungle neo cons would say caveat emptor(buyer beware), laiz faire(anything goes), I say it was a blatant fraud carried out by the insiders of finance against a to trusting realsector. The ultimate aim to steal back the now highly improved assets of the realsector farmer for cents on the dollar what they were hyped into borrowing from the racketeering bankers to finance those improvements.
January 28th, 2009 at 5:36 pm
I read somewhere that a huge amount of bank finance was directed to the farming sector in the last quarter of 2008. Could these farmers/bankers not see there was a big correction looming?
January 28th, 2009 at 5:43 pm
Doug,
I agree accountability within Fonterra has been, and still is lacking. I expect part of the reason for China behaving as it is towards Fonterra relates to it feeling the same way regards Sanlu. Arrogance from the Fonterra board is resulting in shareholders being punished.
Fonterra board and management have not performed, so I believe heads should already have rolled. That doesn’t mean I believe that Fonterra can be saved – the Mega Co-op model as it exists is fatally flawed and can never be made to work long term. That has been known since before Fonterra was formed.
January 28th, 2009 at 7:30 pm
Put another way, Fonterra (according to data here: http://www.stats.govt.nz/NR/rdonlyres/4A929AD5-50A6-41C9-82FA-6B16D621624F/0/GlobalNewZealandJune2008.pdf) accounted for 22% of NZ’s 2008 export earnings.
The significance of the decline therefore cannot be understated, a fact it seems which was lost on the TV1 news team as I was watching tonight.
Out of interest, our top 10 export earners are:
1 Dairy 22.0%
2 Meat 11.7%
3 Mineral fuels 6.6%
4 Wood 5.0%
5 Machinery 4.8%
6 Aluminium and articles 3.6%
7 Fruit and nuts 3.4%
8 New Zealand misc. provisions 3.0
9 Fish 2.8%
10 Starch 2.8%
January 28th, 2009 at 8:12 pm
Iain Parker> The ultimate aim to steal back the now highly improved assets of the realsector farmer for cents on the dollar
Whooooo… Iain and all the rest of your funny money socialist mates, it’s all a big global conspiracy, whoooo, don’t sleep tonight, there’s also scary ghosts in your closet and they’re going to come and GET YOU!
Back in the real world, demand has dropped for a commodity, the auction system clears the market and prices fall. Big hairy deal.
I could survive a 1.5% drop in income, man I could survive a 20% drop in income, not pleasant but no the end of the world.
In fact my income has gone backwards by about 10% this year so I’m in the process of DOING SOMETHING ABOUT IT, rather than WORRYING ABOUT IT. Loads of other sensible Kiwis do the same thing!
January 29th, 2009 at 8:29 am
Payout was higher last year, but production was well down due to the drought.
Having grown up on a farm and having most of my family own multiple farms I think most traditional farmers will be sweet. About a third of the farms in my family have been passed down from my great grandparents. Another third were purchased in the 80’s for peanuts and the last third are conversions in the south island done in the last 10 years.
January 29th, 2009 at 8:54 pm
Iain Parker> trusting realsector
‘realsector’ – jeez is that 1984 newspeak or what – what’s next the Ministry of Savings that actually destroys the economy – you funny money loonie tunes don’t do yourself any favours…
January 29th, 2009 at 9:26 pm
Richard – Keep going sport, you are doing me all sorts of favours and providing many with a good laugh.
Most on this site and most anyone else with an ounce of financial literacy now comprehend that there is only one entity that has the ability to print non backed money and loan it out at interest, that is the privately owned central banking network.
The real funny money people, ripping off the Realsector. The Realsector and the Financial sector were terms used by the monetary mercenary Roger Douglas in his book Toward Prosperity.
Richard your starting to sound a lot like Bob Jones of the same era.
Checkout this from the RBNZ PAGES 25-33
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1editorsnote.pdf
and this from NZ Bankers Association pages 18-22 on the creation of money and credit.
http://www.nzba.org.nz/pdfs/Banking%20in%20NZ-06-final.pdf
Learn a bit, then get back to us. You might then start giving the correct people the “funny money label”
January 29th, 2009 at 10:15 pm
Iain,
thanks for that link to the nzba paper. Very interesting. Have been wanting to get that information for some time now.
Re the rbnz paper. That was the index to the bulletin. I believe you may have meant to point to:
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf
The massive increase in house prices looks to me it might be covered by the sentence “policy deliberation no longer focuses on trying to control the money supply”. If I’m reading this right, the money supply has expanded dramatically over the period of the housing boom, mainly driven by new housing loans, where new money was created a plenty.And as CPI doesn’t / didn’t measure increases in house prices, the CPI massively under-measured inflation. So the interest rate increases to control the fuzzy measure of inflation (rather than real inflation) should have been much higher, much earlier.
I’ll need to read those papers more than once.
January 30th, 2009 at 4:34 am
Gibber – They say you take in 10% the first time you read something, 20% the next and 30% the third time, by the third time you will remember the important facts off the top of your head, but most importantly you will know immediately where to go for revision of the intricate details.
You have nailed one of the most malignant shortcomings of the fraudulent system first time up.
Good luck to you and your family.
January 30th, 2009 at 7:22 am
Iain,
you might be interested in this commentary on the bailout proposed by Obabma’s team
http://www.chrismartenson.com/blog/government-offers-buy-impaired-401k-assets/12386
“Seems to me somebody has it wrong here. Either the financial system is private, in which case those private holders should eat the losses, with shareholders getting largely wiped out, or it is not privately owned and run. If they are to be publicly run with taxpayers eating the losses, then here, too, we should find current bank shareholders being either completely wiped out or seriously diluted.”
January 30th, 2009 at 8:49 am
Gibber,
Exactly.
The private banks have always received a subsidy from the taxpayer. We’re just seeing it more clearly now than before.
Either it’s a private business or a public good. Personally I think it’s a public good but that’s just my opinion. The hold that they have over the taxpayer is that they hold our deposits though we know if we marched down to withdraw them they wouldn’t be there.
Time to separate the true business of banking from the public process of creating money.
February 2nd, 2009 at 9:31 pm
Iain> The Realsector and the Financial sector were terms used by the monetary mercenary Roger Douglas in his book Toward Prosperity.
I’m sure he referred to the real sector – my point was running them together into one word as in the Orwellian and Huxley classics.
Regarding debt you should take a look at the very funny Saturday Night Live clip in the middle of I.O.U.S.A – if you want to get out of debt don’t buy stuff you cannot afford.
http://www.iousathemovie.com
By the way I’m not Bob Jones and although I find him funny at times I’ve also heard bad things about his business practices – not that I know if they’re true
February 4th, 2009 at 7:30 am
The real payout this year (at the moment) is $3.55
Predicted payout = $5.10
Reduced share price= -$1.10
Retained value added component = -$0.45
Result = $3.55
February 4th, 2009 at 8:39 am
Steve,
you havn,t taken off the 300 mil +, Fonterra are raising through a bond issue for ‘GENERAL BUSINESS EXPENSES’. This to me is as good as saying we are paying out more than we can afford. Anyway who the hell raises money by a bond issue for general operating expenses. Its like a family borrowing money to buy food,its nuts. I’d avoid them like the plague. I cannot see how they can survive. A major share adjustment must be due.