Fonterra forecast payout cut points to tougher times
Dairy farmers are being warned to dust off emergency budgets after two forecast payout downgrades this month, the latest of which was from Fonterra today.
Fonterra is revising its milk payout forecast range for the 2012-2013 season down 30c, to $5.25/kg milksolids from $5.50/kg. That means $500 million less for the New Zealand economy than predicted for this dairy season.
The opening season forecast was $5.65-$5.75 before retentions for a fully shared-up farmer.
Westland Milk Products also downgraded its payout forecast earlier this month. The West Coast co-operative is now forecasting a $5-$5.40/kg milksolids payout instead of a budgeted $5.70-$6.10.
Federated Farmers said both companies' payout cuts were harbingers of tougher economic and farming times.
Dairy arm chairman Willy Leferink said Fonterra's cut "will hurt".
Given farm working expenses before interest and tax were around $4.20/kg milksolids, Fonterra's key milk price forecast of $5.25/kg left little or no free room.
"Most farmers would have prepared two budgets based on a mid and low $5 payout. Farmers should now realign their lower end budgets down to $5. I really hate to say it, but I'd dust off those emergency budgets from 2008-2009 for added pointers.
"It has been a hell of a wet season and with calving still underway, farmers are under immense pressure," Leferink said.
But Fonterra farmers watchdog, the Fonterra Shareholders Council, took a more optimistic tack.
Chairman Ian Brown said the 17 per cent improvement in Fonterra's Global Dairy Trade auction over the last quarter was a positive sign that improvement may be just around the corner.
"At some stage the massive effort we've been putting in, the record volumes we've been producing and the product we've been moving needs to positively affect our payout," he said.
"The current payout range is a reflection of the volatility of the market. Until it comes right we've just got to keep doing what we do best - work our farms, milk our cows and be prudent in our financial planning. "
The dairy giant blamed the continuing strength of the kiwi dollar for the cut.
Fonterra has also lowered its forecast net profit after tax range to 40-50c, from 45-55c a share at the season opening.
BNZ economist Doug Steel said the reduction was no big surprise.
Given the mix of international dairy prices and the strength of the currency, there was always some downside risk to the opening payout forecast, he said.
Steel said the reduction shaved $500m from the expected benefit to the national economy.
The reduced forecast comes despite improving prices on Fonterra's online auction Global Dairy Trade, considered a barometer of world market prices.
Overall, the GDT trade weighted index was up 4.1 per cent over the past four trading auctions, underpinned by a 7.8 per cent rise in the average price on August 15.
But prices were low compared to a year ago and the New Zealand dollar remained strong against the US dollar, Fonterra chairman Sir Henry van der Heyden said.
Chief executive Theo Spierings said Fonterra's consumer businesses were under pressure because of the unfavourable foreign exchange translation effects in many markets, and a difficult retail trading environment affecting the dairy giant's Australia-New Zealand business.
"Accordingly we have lowered our forecast net profit after tax range to 40-50 cents a share."
While today's cut in payout confirms economists' predictions that the 2012-2013 season payout could come in well below that of the still-to-be-announced 2011-2012 season payout, there is still a lot of milk to flow under the bridge before the end of this season.
The final payout for the 2012-2013 season will not be known until October next year.
The 2011-2012 payout was $7.90. That season was marked by a string of payout forecast changes because of international price softening and the strong kiwi dollar.
The latest fall was in May this year when Fonterra revised down its 2011-2012 payout range before retentions by 30c to $6.45-$6.55.
Van der Heyden said despite today's cut the advance payment rate to farmers would not change, which means their cash flows will not be crimped.
There were some signs of strengthening dairy prices, partially driven by global weather extremes, including drought in the US, he told Fonterra's 10,500 farmers in an email.
Spierings, however, warned that even if international prices increased, the currency would continue to eat into any gains.
"Our forecasting anticipates some recovery in global dairy prices but we don't know how strong this recovery will be or when it will kick in. For this reason our farmers should continue to plan cautiously."
- © Fairfax NZ News
Do you agree with Meat Industry Excellence chairman John McCarthy's views that it is not in the national interest to turn New Zealand into a giant dairy farm?Related story: Sheep, beef concerns over dairying squeeze