Farm income drop will also hit community
Waikato dairy farmers are preparing to tighten their belts after Fonterra cut its milk price forecast from $7 to $6/kg milk solids for the 2014-15 season.
The $1 cut would mean a $378.5 million hit to the Waikato economy, based on last season's production figures from DairyNZ.
For the average Waikato farmer with a 337-cow herd producing 330kg of milk solids (MS) per cow, the reduced forecast would mean a $111,210 drop in the price paid for their milk.
ASB and Westpac have forecast the collective income of New Zealand dairy farmers could drop by between $3.8b and $4.3b.
The cut was widely expected by farmers and economists after milk products sold on Fonterra's fortnightly Global Dairy Trade had dropped 16 per cent since the start of the season on June 1. In its most recent auction, product prices fell 8.9 per cent.
The co-operative announced an estimated dividend range of 20-25 cents per share, amounting to a forecast cash payout of $6.20-$6.25 for the current season.
The extent of the drop surprised Waikato Federated Farmers dairy chairman Craig Littin, who hoped the forecast would be $6.50/kg MS.
"That will get farmers re-visiting cashflows and adjusting their spending accordingly," he said.
While $6 was not a bad payout, it was vastly different to the record $8.40 payout farmers received last season.
"Farmers are extremely resilient and can adjust cashflow quite rapidly when they have to. Obviously they can't change fixed costs, but that discretionary spending [cut] will be felt through the wider community."
Federation dairy section head Andrew Hoggard said the cut was a "bummer".
About 20 per cent of the country's farmers had production costs over $5/kg MS and the new forecast put many of those farmers in a loss position after debt servicing costs were added on.
"There could be potentially 20 per cent of farmers making a financial loss this year and the rest making much less of a profit than last year."
Hoggard said it was a clear warning sign for farmers to be prepared and to budget accordingly.
"Look at where you can trim in your system and do so."
He said there was still a long way to go in the milking season and farmers should not get too despondent.
"Let's not get too down in the dumps just yet. There is a long way to go and a lot of things can change and we are getting used to all of this volatility."
The lower forecast reflected continuing volatility and declines in the GDT, Fonterra's chairman John Wilson said.
"We have seen strong production globally, a buildup of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices. In addition, the New Zealand dollar has remained strong."
The drop will have an impact on the cashflows of farmers. "We continue to urge caution with on-farm budgets in light of the continuing volatility in international dairy markets."
Fonterra's milk collection across New Zealand last season reached 1584 million kg MS, an 8.3 per cent lift on the previous season, Wilson said.
The increase in volume reflected the Fonterra's expectations for improved returns on its value-add and branded products, given volume increases and lower input costs, chief executive Theo Spierings said.
Looking ahead, he anticipated some recovery in global dairy prices but it was too early to predict how strong this recovery would be or when it would occur.