'Very tough times' ahead for dairy farmers as Fonterra cuts milk payout forecast to $3.90 a kilo
Farmers are being urged to keep an eye out for one another as a cut to forecast milk payments leaves many facing a winter of mounting debts and possible forced farm sales.
Fonterra chief executive Theo Spierings said dairy farmers were in for "very tough times" after Fonterra cut its forecast payout for milk solids by 25 cents a kilo, but he said Fonterra itself remained sound.
Fonterra Shareholders' Council chairman Duncan Coull said the forecast would put farmers under more personal stress.
"It's imperative we keep in touch with our neighbours, friends and families, and all support each other where we can," he said.
The cut would mean dairy farmers would earn about $400 million less than previously expected for their milk in the 2015-16 season, Spierings said.
The new forecast price of $3.90 a kilo was "unsustainably low", but Fonterra was assuming the situation would not improve before Christmas, he said.
Prime Minister John Key said "inevitably you'll probably see some farms being sold, but overall, as we've said before, farmers are very resilient at dealing with these issues".
Bankers who he had spoken to were taking "a considered and sort of cautious approach" to the situation, he said.
"They're very much taking the view that they're not going to rush to be forcing people off their farms, but inevitably there are a few that are going to be highly indebted."
Finance Minister Bill English said the strong performance of other export sectors would help offset the economic impact of lower milk prices.
While some farmers were calling for interest rate cuts from the Reserve Bank, English said that would be unlikely to have a significant effect.
Labour finance spokesperson Grant Robertson said lower payouts showed "the real danger of not diversifying the economy".
"National should have prepared the country for the downturn in milk prices but instead they encouraged more dairy conversions," he said.
Waikato Federated Farmers president Chris Lewis said it would be a "very lean winter".
"It's gone past a blame-game. It's going to be survival for farmers and the wider industry."
Taranaki Fonterra shareholders councillor Noel Caskey, of Stratford, said even established farmers were saying they'd never experienced such tough cashflows.
"A lot of farmers are saying why didn't the industry seeing it coming."
Westpac senior economist Michael Gordon said the downgrade put Fonterra's forecast below the bank's own forecast of $4 a kilo and "could see business confidence slide further in coming months".
Spierings said dairy demand from China was recovering at a slow annual rate of about 4 to 5 per cent, but sales to oil-producing countries had been impacted by the low oil price, while exports from Europe were strong.
In one sign of the knock-on effects the lower milk price could have on the wider economy, Fonterra has confirmed about 3600 to 4000 businesses that provide services to Fonterra are having to wait up to three months to be paid.
"Let's be clear here, Fonterra is absolutely sound – a very sound business," chief financial officer Lukas Paravicini said.
Fonterra invested heavily last year to increase the volume of milk it could process in New Zealand and had since committed to not increasing its debt levels, he said.
Chairman John Wilson said the lower forecast price would come on top of an expected 4 per cent drop in milk production.
"Clearly these prices are unsustainably low for our farmers in New Zealand and more widely," he said.
"Farmers globally are starting to come under some pressure.
"We are very confident around the medium term outlook for dairy," he added.