Fonterra cuts milk payout forecast to NZ$5.10/kg (update 3)

Fonterra cuts milk payout forecast to NZ$5.10/kg (update 3)
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.    

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