Optimism gives way to uncertainty

Optimism gives way to uncertainty
It is the speed with which unbridled optimism has turned to fear and warnings to curb spending that has surprised dairy farmers. For the past two years, Fonterra single-handedly grew NZ's economy (if you remove the contribution from borrowing to spend), but in the space of four months the global credit crunch and reaction to excessive product prices have hit it head-on like express trains. From talk of expansion and unsatisfied global demand for dairy products, just four months later Fonterra is stockpiling product waiting for international prices to recover. The immediate impact has been a slashing of the milk payout in New Zealand and Australia, land prices have subsequently fallen more than 20% and falling cow prices have eroded sharemilker's equity. Cows they paid $2500 for last season are now worth $1800. And the news was only expected to worsen this week, with Fonterra reviewing its forecast payout for the season with some expecting the final payout to be between $4.80 and $5.20 kg milksolids (kg/ms). A cut of 1c kg/ms equates to $12 million less in export earned income circulating through the economy. There were clear signs last week of the difficult trading conditions when it lowered by 32% the milk price paid to its Australian suppliers between February and June, which represented a 9% cut over the full season. Farmers have told the Otago Daily Times that they feel this has been mismanaged and poorly communicated to them, in contrast to the good news coming out of the Auckland head office. A year ago, Fonterra was telling shareholders they were about to enter a decade of above long-term average payouts, but the reality has been a sharp and rapid downward correction which shows no sign of bottoming out. Last July, it announced that dairying accounted for a quarter of New Zealand's export earnings and in the 14 months to May 31 it had generated $19.5 billion in revenue.

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