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Milk payout fall to impact next season

Rural News
Milk payout fall to impact next season

Fonterra's reduced dairy payout will have a bigger impact on the rural economy next season, says National Bank's weekly economic report. With the payout spread over 14 months, a lower forecast not only impacts cash flow today but also heading into the coming season, which starts on June 1. Fonterra has reduced its forecast payout for the 2008-09 season to $5.10/kgMS, a 90c drop blamed on dwindling dairy prices and the economic climate reports Rural News. The bank says dairy farmers will find it hard to reduce costs for the rest of the 2008-09 season given that supplementary feed costs for instance are now fixed and two thirds of the financial year has already gone. "˜Arguably it is the cash flow in the new season that will be more influential on the NZ economy,' it says. The initial advance for milk received by the cooperative is 60% of the forecast price and farmers are paid on the 20th of the following month. This season Fonterra has continued paying its farmers an advance of $4.05/kgMS despite a drop in the forecast payout. The cooperative only pays an advance and not the full forecast price for cash flow and risk reasons. The forecast payout is increased if market returns are better than expected. The advance rates are also increased. However, the converse also applies.The bank says if the market does not deliver and the forecast has to be reduced then the advance payments will not increase as fast, not at all, or in a worst case scenario, will be clawed back.  The bank predicts an advance of $3.10/kgMS for the 2009-10 season based on a forecast payout of $5.10/kgMS. "˜That would be around a dollar less than the current advance,' it says. "˜Second, the traditional timing of increases in the advance payout during the season may also be delayed if the outlook remains very uncertain, further adding to the cash flow pressure on farmers.' The bank says pushing out the 2008-09 value added payout is one way of softening a low advance in 2009-10.

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