Banks forecast a 13% payout drop next year

Fonterra may cut 2012 payout banks say.

Rural News

Fonterra may cut 2012 payout banks say.

13th May 11, 11:12am by Tony Chaston

Banking economists are predicting a payout back on this years high, in the $6-$7/kg ms range, mainly because of the strong currency.

NZ exports vunerability to an "undesirably high" currency has been acknowledged by the Govenor of the Reserve Bank, but with our debt so high and pressure to repay, a balancing act is needed to keep the economy stable.

Latest livestock production figures (2009/2010) do show that the growth in dairy cow numbers is flattening out, although this years prices and conversions have not flowed through yet. Fonterra is however still predicting 3-4% milk production growth to continue, although so much depends on the weather with this year's poor spring, and the recent mild wet autumn good examples of this variability.

Fonterra, the world's largest dairy exporter, may cut next season's farmer payout by about 13 per cent as NZ's currency strengthens, ASB Bank and BNZ have said.The company may pay its 10,500 farmer shareholders $7 a kg of milk solids in the year ending May 31, 2012, James Shortall, a rural economist at ASB, said by phone. It may be as low as $6 a kg, Doug Steel, markets economist at BNZ, said in a separate interview.

NZ is relying on exports, which make up about 30 per cent of the economy, to buoy a recovery from the Christchurch earthquake in February reports The Herald. The gain in the so-called kiwi cuts earnings for companies that incur costs in the local currency and earn revenue in dollars. "The potential of the NZ dollar trading around 80c and even going higher later on this year, we think that's going to impact on payout," Shortall said.

The kiwi has climbed 6.2 per cent versus the US dollar in the past two months, the best performance among 31 major currencies, according to Bloomberg data. Fonterra accounts for about one-fifth of NZ's export revenues."On currency effects alone, you would expect the best part of $1 to be lopped off," Steel said.Fonterra increased this season's forecast payout range before retentions to $7.90 to $8 on February 22, citing rising global dairy prices. Whole milk powder prices jumped to a record $4958 a tonne on March 1. Powder reached $4008 a tonne at auction on May 3.

Reserve Bank Governor Alan Bollard said yesterday the kiwi was "undesirably high" against the greenback and the economy would perform better if the exchange rate fell. Fonterra is required to release its share price for the 2011-2012 season before it begins on June 1, according to legislation.

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4 Comments

by walker janette | 13th May 11, 11:50pm 1305287421

Potentially a 13% drop in income for Dairy farmers,over leveraged banks, Reserve Bank regulations rolling out, hope the world cup is the boost everyone hopes it will be.

When is some decent fiscal policy going to appear?

English can set the exchange rate within a range, it is in the Reserve Bank Act, just needs an Order of Council.

Banks are going to have to come up with plan B, receiverships and mortgagee sales aren't going to cut it.

by VC | 14th May 11, 9:07am 1305320854

That makes a lot of sense....not

Fixed exchange rates prevent a government from using domestic monetary policy to achieve macroeconomic stability.

We're borrowing $300M per week JW. Fixing an exchange rate would not only impose huge cost on the Government (where would we find the enormous capital reserves required to fund such a system?).

Currency isn't the issue. It's a lot easier for the Fonterra's of this country to employ strategic hedging policies (as they do) than it is for the government to rejig the entire exchange system. Or how about the average Jo Blow farmer buying his own foreign currency post sale.

Its not up to the banks to bail this one out. The fact that our major banks have maintained their AA credit ratings over the last 3 years (there are only about 10 in the world who have done so I believe) has already been a saving grace for kiwis scared of seeing interest rates closer to 10% than 5%. Receiverships are part of an economic process, guts me as kiwis we are always looking to blame someone else for our personal failures.

We're on the right track with our free trade talks, lets not turn our backs on the world who is starting to view us as intelligent traders with open markets, and instead protectionist fools.

by walker janette | 14th May 11, 9:30am 1305322239

What domestic policy?

Exchange rates do affect exporting industries.

Fonterras hedging some time ago I think 2009 lost $700 million, so they are not bullet proof.

Banks will have to come up with alternative strategy. The only reason banks survived was because of govt intervention re guaranteed deposits.A lot of farmers have interest rates in the 9% range.

So destroying export earners is part of the economic process, it is a cold world you live in.

I am not looking to blame, just saying come up with a better solution.

As for free trade talks have a look at the demands that the Trans Pacific Partnership requires. The rest of the world has protectionist policies in place.

If the free market philosophy was so great why the Global financial meltdown and the subsequent Reserve Bank regulations to " protect" our Financial systems.

by VC | 14th May 11, 3:56pm 1305345406

I don't quite see your point here. Why should they find a solution? Sure they have made a lot of money over the years as a result of their involvement in new zealand's primary industry, but so too have the majority of farmers who have enjoyed phenomenal equity growth in the last decade as a result of bank lending. Maybe they should have to find the solution, where do you draw the line?

Hedging isn't a perfect system no, as with currency fixing you are taking a position you think is in your best interest. Difference is that hedging shifts the burden from the public sector to the private sector. Its time we got out of this socialist mind set so prevalent in this country, an idea promoted by people with an axe to grind because they have lost out as a result of their own poor judgement.

You can argue against the free market all you want, but there are more examples of failures in highly regulated economies. How is the USSR getting on these days?

Deposit guarantee hurt the banks more than it helped them. What were the options for savers. Finance companies? Stuff it in the matress? Or a double A rated bank. It just imposed additional unnecessary cost. The wholesale guarantee that enabled the big banks to get foreign currency in was of more benefit.

Are export earners getting destroyed at the moment? COuld have fooled me. Near record high exchange rate and yet everything from milk powder to wool is well up at near record levels as well? We have a commodities currency, we will rise and fall with them, and largely it negates each other. Why tamper with that at enormous cost?