Fonterra revises down milk price to $3.85 video

CHRISTEL YARDLEY/stuff.co.nz

Dairy farmers are feeling the pinch after another drop in the dairy payout.

Fonterra's decision to slash the price it pays its farmers for milk solids will wipe $2.5 billion off the economy, an analyst says.

Fonterra has cut its milk price forecast to $3.85 per kilogram of milk solids, down from $5.25.

Fonterra has also announced it will provide an estimated $430 million in financial support for farmers to help them cope with the low payout.

Fonterra chief executive Theo Spierings.
Chris Skelton/Fairfax NZ

Fonterra chief executive Theo Spierings.

DairyNZ chief executive Tim Mackle said the news was grim, but not unexpected and many farmers would now be in survival mode.

The drop in milk price would result in $2.5 billion dropping out of rural economies, Mackle said. 

"Milk price is now half what it was in 2013/14. We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses," Mackle said. 

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"For the average farmer you are looking at covering a business loss of $260,000 to 280,000 this season but for many it will be a lot more than that."

It would have a big impact on rural servicing businesses. Drops like this had a cascading effect through rural economies, Mackle said.

DairyNZ analysis showed the average farmer now needed a milk price of $5.40 to break even.

Westpac senior economist Michael Gordon said: "Compared to an average milk price of around $5.80 per kg, today's announcement implies $3.3b less revenue than normal for Fonterra's [farmers]".

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ASB rural economist Nathan Penny said he continued to expect the milk price recover to $4.50 per kgMS by season end.

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Waikato Federated Farmers president Chris Lewis said the payout announcement was sobering for some and stressful for others.

"As an OCD (Open Country Dairy) supplier I've been softened up a few weeks ago when OCD announced their $3.65 -$3.95 milk price.

"I guess a lot of Fonterra suppliers were hoping that Open Country were just at the bottom end of the scale and Fonterra would be somewhere in the middle."

"Sadly that hasn't played out."

It meant now that all farmers would be making a loss this season, he said.

He said this was amongst the toughest economic conditions he had faced.

"It was tough back then [2008] but it was only for one season and what makes this different is it's going to be two seasons.

"And most old hands will tell you that that is a different thing in the last 20 years is two seasons of tough costs. And since we've had a low payout, inflation, the cost of things has probably doubled since then." 

He said there were three things farmers needed to concentrate on once they had come to terms with the cut.

Firstly, inspect last years' accounts, which were based on a $4.40 payout year, look at their costs and see what could be taken out.

"Get a payment predictor of their dairy farm, do a budget, get some help and work out work how big the loss is going to be."

Farmers should then make an appointment with their bankers and communicate that clearly.

"My third thing is, while having money is important, or in this case the lack of it, in most cases at the moment. The most important thing is your family and friends, and I encourage farmers to stay strong and positive as one can be and look after each other.

"That's the most important thing in life."

He praised Fonterra's announcement of a support package in the form of an interest free loan of 50 cents per kgMS for production between June and December.

"I think good on Fonterra for trying to come up with an interest-free loan for their farmers ... but farmers will eventually have to pay that back.

"At the end of the day farmers can only cut back so much, because they don't want to compromise on quality on the milk, the environment or anything. There's only so much farmers can do in this situation."

Labour finance spokesman Grant Robertson said billions of dollars was disappearing from right in front of farmers' eyes.

"Fonterra's forecast payout will make life tough for many farmers. It also puts pressure on the communities around them. It means dairy farmers are $5.7 billion in the red over two seasons compared to a break-even payout of $5.70. 

"In the Waikato dairy farmers' debt is $1.5 billion. In Marlborough and Canterbury it's $1.2 billion. In Taranaki it's $600 million."

Chairman John Wilson said the farmgate milk price forecast has been reduced due to the continued significant imbalance in the global dairy market between weak demand and surplus supply.

"This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with.

"Current prices are unsustainably low and we are seeing them beginning to impact production levels globally.

"We have confidence that prices will recover over the course of the season. However, it will be a tough season for our farmers.

"The range of possible scenarios is contributing to the uncertainty we are seeing today.

"We know the global dairy market will improve. The hard thing to call at the moment is exactly when and how quickly," said Wilson.

Wilson said Fonterra would offer support to farmers in the form of a loan to help them deal with the challenging conditions.

All Fonterra share-backed farmers will be given the opportunity to apply for Fonterra co-operative support amounting to an additional 50c per shared-up milk solids for production for the season.

This payment, interest free for two years, will be paid back when the farmgate milk price or advance rate goes above $6 per kgMS.

A first payment will be made in October for June to December and will continue until May.

Fonterra co-operative support for the first half of the season (June to December) is estimated to be worth up to $430 million, depending on take-up rates.

Fonterra chief executive Theo Spierings said the low dairy prices were not unique to New Zealand but a global situation. 

"It's been a long time since we've seen it, it's been a long since our farmers have seen it, and we will make sure we are doing everything and using all the strength of our co-op to see [our farmers] through this period," Spierings said.

The support will be funded by one-off savings generated by changes the business is making, such as improving working capital.

Fonterra has reduced its New Zealand milk volume forecast for the 2015/16 season to 1.59 billion kgMS, 2 per cent lower than the previous season.

Wilson said the revision reflected the likely impact of farmers using more traditional practices to manage their farms as a result of the low payout forecast.

"We are already seeing our farmers reducing stocking rates and reducing supplementary feeding to lower on-farm costs.

The New Zealand dollar initially fell after the Fonterra payout announcement, but then rose about 20 basis points to US65.6c late in the day.

ANZ senior foreign exchange strategist Sam Tuck said broadly speaking, the announcement was in line with what the markets were expecting.

Green Party primary industries spokesperson Eugenie Sage said farmers and rural communities were wearing the cost of the Government and Fonterra's strategy of unlimited growth in milk supply.

"The National Government and Fonterra's preoccupation with growth at all costs is making the dairy sector more vulnerable and less resilient to swings in world commodity prices as well as drought and extreme weather events," Sage said.

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