Fonterra forecast will slash NZ farmer income

Fonterra's been under pressure to make a call on prices as soon as it's confident it has the market information.
NICOLE JOHNSTONE/FAIRFAX NZ

Fonterra's been under pressure to make a call on prices as soon as it's confident it has the market information.

The latest fall in Fonterra's forecast payout slashes $800m from farmer income in New Zealand, with rural communities set to bear the brunt.

The dairy co-operative reduced its forecast payout for the current season to $4.15 a kilogram of milksolids from $4.60/kg. It would currently equate to a forecast cash payout of $4.50-$4.55/kg to Fonterra farmers.

DairyNZ senior economist Matthew Newman said the forecast revision equated to an $800 million reduction in farmer income in New Zealand.

Fonterra farmers knew it was coming but the latest cut will still hurt.
CRAIG BATES/FAIRFAX NZ

Fonterra farmers knew it was coming but the latest cut will still hurt.

This meant an average loss of $67,000 based on a 150,000kg milk solids production.

 For Waikato, it meant a $220 million loss of income for farmers.

"A lot of that would normally be spent back out in the community," he said.

For the average farmer producing 120,000kg milk solids, it meant a $55,000 loss in income.

DairyNZ has held its break even milk price at $5.40, despite the revision. This is because it is a cost driven price and there was little opportunities this far into the season for farmers to further cut costs.

"The income received from milk this year will be about $1.50 less than that and it's going to have to be found from other sources."

One of the few positives to emerge this season was that El Nino had not hit as severely as predicted and production had held up reasonably well.

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"Nationally, we're about 2.6 per cent down to the end of December and for Waikato, it's a bit worse at 5 per cent."

The cut came as no shock to Waikato farmers attending the Grasslandz field day at Eureka, east of Hamilton.

John Dixon has been a dairy farmer for 60 years and had seen plenty of lifts and falls in the forecast.

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"We have no control over the rural commodity cycle," he said.

"You've just got to take them as they come and do you know what the secret is? Don't spend it all. When you get a good year like last year, you put it away and you don't spend it all."

Farmers had to learn to weather the storm, Dixon said.

"You can't run to the bank manager every time there are depressed prices."

Farmers had been steeling themselves for a revised milk price after Westland Milk Products lowered this week its payout predictions to $4.15-$4.45/kg from its last forecast of $4.90-$5.30/kg for the 2015-16 season and Open Country Dairy reduced its payout to $4-$4.30/kg.

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ANZ had tipped a forecast of 4.25/kg so the reduction was slightly more than expected, but not too surprising, chief economist Cameron Bagrie said

"To me the big issue is where they're going to be by May this year, because by May this year they need to see prices pick up to have any confidence over what dairy prices are going to be flagging for the 2016 and 2017 season.

"The longer we see these dairy prices remain around these levels or low, the less confidence we're going to have in a rebound in next year's dairy payout, and if we don't see that you're going to see cashflow into the rural sector look awful right into 2018.

"It's another gestation issue for the NZ economy - we're going to take a knock, I don't think it's going to be a knock-out punch."

GLOBAL FACTORS IN PLAY

Global economic conditions continue to be challenging and are hurting demand for a range of commodities, including dairy, Fonterra chairman John Wilson said.

"There is still an imbalance between supply and demand which continues to put pressure on global milk prices.

"Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase."

Federated Farmers dairy chairman Andrew Hoggard said the price slump was "unwelcome but not unexpected".

"It had been pretty well signalled, most commentators have been predicting it will go lower," Hoggard said. 

He would have been "a bit upset" if Fonterra had waited a month to make the announcement.

The co-operative has been under pressure to make a call on prices as soon as it is confident it has the market information.

Hoggard said he was worried about some of the fallout from lower prices, particularly among sharemilkers.

"A few sharemilkers I know are calling it quits, there is a concern with a third season of possible low payouts."

TOUGH TIMES

Fonterra Shareholders' Council chairman Duncan Coull said the forecast cut would "further amplify the effects of the current low milk price environment on farmers and their businesses."

"Farmers are very aware that this is a global story which is now having a significant local effect," he said.

The impact differed according to regions.

Dairy properties in the Waikato, Taranaki and Manawatu were still selling, but Northland and Southland were under pressure.

Waikato Federated Farmers dairy section chairwoman Jacqui Hahn had hoped the Fonterra would have matched Open Country Dairy's recent forecast cut of $4-$4.30/kg MS earlier this month.

Farmers had already had a hard Christmas and this latest cut would put further economic pressure on them.

"You've just got to do what you can. Grass management is going to be everything now."

The recovery would be slow and farmers would have to maintain their tight budgets over and above next season, she said.

"You'll still have to run a tight ship. Plan for the worst, hope for the best."

While there was no surprise in the announcement, provincial president Chris Lewis said it would hit a lot of farming families hard.

"The most at risk are new entrant sharemilkers and new farm owners. There'll be some tough conversation they will be having around the kitchen table."

Lewis had some sympathy for the country's dairy companies, who he believed were trying their hardest to get as much value as possible from milk products.

"A lot of this is just outside their hands and there's no point in a blame game. It is what it is."

He urged farmers to talk to their accountants or consultants to go over their budget for the rest of the season.

"Surround yourself with positive people who are realistic and can help you navigate through this tough time."

He said it will take years for farmers to navigate themselves out of the financial hole caused by the slump in dairy prices.

"You need to make quite a few years of profit to pay back the losses."

ASB economist Nathan Penny echoed Hoggard in saying the announcement was no surprise, but unwelcome nonetheless. 

"Prices may well be weaker for a bit longer given the volatility in markets and the sentiment that's weak on that front," Penny said.

A low New Zealand dollar would not assist farmers this season, but was more likely to next. For that reason the ASB was sticking with a relatively optimistic $6.50/kg for the 2016-17 year.

Penny agreed that some farmers were struggling, but they were ones that were already finding it difficult to make ends meet.

The one positive was that the El Nino weather system has not yet been as damaging as expected, except that pockets of the country such as North Canterbury were still suffering from the impacts of last season's drought.

Hoggard dubbed the El Nino "El Whato" or "El No Showupper".

"We are sitting pretty with plenty of grass growing," he said.

It was unlike last season when farmers had to cull their herds early in the new year because of dry conditions.

 - Stuff

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