Major cut to dairy payout predicted
The Waikato economy may have to wear a billion-dollar hit if farmers' predictions of a big dip in Fonterra's forecast for next season prove correct.
Fonterra is expected to announce next season's forecast next Wednesday, but the region's dairy farmers are already expecting it to drop from a record $8.65 kg/milksolids this season to as little as $6 in the 2014/15 season.
If they are right the average Waikato dairy farmer, whose herd produces 115,211 kg/milk solids according to the latest DairyNZ figures, would receive $691,266 for their milk next season, $305,309 less than the $996,575 they are expecting this season under a $8.65 payout.
DairyNZ figures said there were 3556 dairy farms in the region, so a drop to $6 would result in a predicted $1,085,678,804 drop in the region's collective dairy cheque.
Such an announcement would likely affect confidence at the National Agricultural Fieldays, which opens at Mystery Creek near Hamilton in three weeks, and would have spill-on effects through the region.
Federated Farmers Hauraki-Coromandel provincial president Kevin Robinson was the most pessimistic of farmers Fairfax Media spoke to.
Robinson was banking on a $6 per kg of milksolids payout.
He said there were a lot of factors involved before final payout was announced.
"Most farmers budget for a lower payment and hope for higher one," he said. "Most farmers have had a good year this year so it might be time to tighten the belt a little."
Federated Farmers national dairy board chair Willy Leferink was only a little bit more optimistic.
Farmers could be expected to see a forecast as low as $6.50, on the back of seven straight drops in the global dairy auction and a high New Zealand dollar.
"If you do better than that, you should pocket it rather than spend up," he said.
Dairy commodity prices fell 1.8 per cent on Fonterra's global dairy auction on Tuesday night, continuing a three-month decline that has seen prices the world is prepared to pay for New Zealand dairy products fall by more than 20 per cent. Prices are at their lowest level since February last year.
Leferink said the immediate flow on effects to the wider economy of a cut in predicted payout would be months off, as farmers would be operating on the current season payout.
"We haven't had all the spoils yet from this season."
We would start to "see the next season evolve" from October, he said.
Leferink said he expected the dairy prices at the global auction to climb again from their current low as consumer demand for products was still high.
"I think we are bottoming out. But in the end who can predict the market?"
That comes on the back of two summer droughts - the first of which saw milk production fall for the first time since the 2007/2008 season. The impacts of this summer's drought are not yet known.
The plunge in global dairy prices also follows a run scandals involving Fonterra milk.
At the start of this year French food giant Danone announced it would sue Fonterra for NZ$492 million in the wake of a botulism scare last year.
The scare ricocheted around the globe when Fonterra announced it had found traces of the poisonous bacteria in its milk, only to withdraw the statement following further testing.
Federated Farmers Waikato new chairman Chris Lewis said a revised estimate on the milk price payout would not be popular with farmers.
"Farmers are realistic, they know what happens in dairy, but no one likes their pay cut.
"It's hard to run a business when it [the global dairy price] fluctuates so much."
Lewis pulled no punches on the impact a lower payout would have on the region's economy.
"If farmers earn no money, people in town earn no money. It's a circle."
He said the impact would take some time to filter through to the economy.
"I don't think they'll notice the drop-off yet. We are still getting money from this season, in two or three months time when we are producing the new season's milk it'll [farmer spend] drop."
His immediate predecessor, James Houghton, predicted a new season forecast to sit around $6.80-$7. He said he
was reasonably comfortable with that payout.
"A $7/kg milksolids payout would still be in the top three or four payouts in [Fonterra] history."
North Waikato Young Farmers Club president Ethan Beattie has his fingers crossed that next week's announcement won't be as bad as expected.
"A low payout is never good, it'd mean we would have less money to put back into our farms."
Beattie said it would be especially tough if the country goes through another drought this summer. "Then it wouldn't be worth feeding your cows. This year we could because of the payout, but if it's a low payout we won't be able to."
Federated Farmers Cambridge chairman, John Searle was more optimistic.
"I wouldn't expect it to go below $7 next year, even with a drop. And we have to remember that this year's payout was high. This is all just a prediction of course, no-one really knows."
John Meaclem, from Te Waotu-based FarmMe, said a payout drop would hurt businesses.
Meaclem said the business he helped create with his wife was set up to relieve farm managers of stress.
"A lot of farm managers will do it themselves," he said. "They'll wear themselves out."
He said it will become a ‘domino effect' for future seasons and the issues surrounding it will stack up.
ANZ chief economist Cameron Bagrie rubbished the idea that the scandals involving Fonterra had any impact on global dairy prices, and said the prices were still at high levels.
"A lot of people tend to put Chicken Little stories around this. We've still got milk powder prices trading around $3900 a tonne which, if you go back and have a look at where at its traded over the last 10 years, that's still well above average," he said.
"We've taken out a bit of cream, but boy, there's still a fair bit of froth there."
He predicted the payout for next season would fall in the $6.50-$7 range.
Bagrie put the recent drop in global dairy prices down to buyers backing off at high levels and higher supply.
Bagrie said a change in payout was unlikely to affect milk prices in shops.
"If they start to move around in a sustained fashion consistently over a one to two-year period, you will see that at the supermarket.
"But generally speaking I'd expect some of the suppliers to try to absorb some of the volatility in prices. You don't want to be chopping and changing your price mix all the time."
Fonterra would not comment on the payout predictions, but earlier this month chairman John Wilson, a Te Awamutu farmer, said there was "downward pressure" on the milk price. Auction prices had tracked down, but this was not unexpected as Northern Hemisphere milk supply increased, he said.