Farmers expecting payout cut
Fonterra farmers are bracing themselves for a $1 cut to the new season's forecast as the co-operative revises its payout today.
Fonterra's board is due to meet today, and farmers and bank economists expect the co-operative to lower the forecast from $7 to $6/kg of milk solids.
A $6/kg payout would mean a $378.5 million hit to the Waikato economy, based on last season's production figures, according to DairyNZ statistics for the 2012-13 season.
For the average Waikato farmer with a 337-cow herd producing 330kg of milk solids per cow, the lower payout would mean a $111,210 drop in the price paid for their milk.
A drop in the payout would be of little surprise to Federated Farmers Waikato dairy chairman Craig Littin, given the recent price falls on Fonterra's fortnightly Global Dairy Trade.
GDT products had dropped by a third since January. The most recent auction, where product prices fell 8.9 per cent, meant the new forecast would be struggling to reach $7/kg of milk solids (MS), Littin said. "I would like to think it would be in the mid $6/kg MS."
The lower forecast could put some farmers' costs structures under pressure as costs such as supplementary feed had risen with two consecutive droughts.
The payout was volatile, and Littin hoped farmers were planning accordingly.
Westpac recently revised down its forecast to $6/kg milk solids.
"This is a far cry from the $8.65 payout of last season, and the effects will reverberate around rural New Zealand for some time," senior economist Anne Boniface said.
The fall in dairy prices was a result of a slowdown of consumer demand in China combined with a high inventory of milk products. "Chinese wholesalers now have more than sufficient stocks on hand to meet relatively-soft demand, and the consequences are rolling up the supply chains for dairy products."
While Boniface was fairly confident that China's rate of economic growth would accelerate over the course of 2014, a recovery in demand for New Zealand export products could take a bit longer.
ASB rural economist Nathan Penny said the bank had revised its forecast following the last GDT auction, from $7 to $6.20/kg MS.
The risk of a sub-$6 payout was rising, but Penny was reasonably confident most farmers could manage it, coming off a record payout last season.
"It would take a run of lower milk prices for farmers to start to feel the pinch."
Those farmers that were highly geared may strike difficulty, but they were a minority, he said.