Payout rise does country a favour

BY JON MORGAN

Dairy giant Fonterra has done New Zealand a big favour in lifting the milk payout to more than $6, economists and farmers say.

The announcement yesterday of a forecast payout for the season ending June next year of $6.05 a kilogram of milksolids promises to:

Pump $1.3 billion more into the economy than the previous forecast of $5.10.

Lift gross domestic product by 0.7 per cent.

Reduce dairy farm debt that has climbed to $3 million a farm while equity has fallen by $2m.

Be a life-saver for rural service firms that are carrying farmers' debt.

Move the average farm out of debt into a small profit.

Provide farmers with the cash to re-invest in Fonterra's restructuring share offer.

However, the biggest impact would be on farmers' confidence. "The first thing they will now do is get a good night's sleep," Westpac economist Doug Steel said.

Farmers agreed. Federated Farmers dairy chairman Lachlan McKenzie said: "There will be an audible sigh of relief from all dairy farmers." And new dairy conversion farmer Charlie Pedersen said: "Armageddon is behind us."

Fonterra's first forecast for the season was $4.55, which would have put the average farm more than $70,000 in the red, according to industry calculations of expenses and debt servicing. The rise to $5.10 in September changed that to an $11,000 debt. Yesterday's forecast of 95c extra puts them on the right side of the ledger with a $22,000 after-tax profit.

However, National Bank rural banking manager Charlie Graham said it would not change the need for a lot of farmers to tighten their finances. "Some won't get back to a cash-positive situation and some may break even but still be very vulnerable. They are still faced with rationalising and restructuring their businesses."

The good news for these farmers was that the land market could now be stimulated enough to allow them to sell at a reasonable price to resolve their financial woes. Farm investor MyFarm director Andrew Watters said the payout rise lifted dairying's profit potential. At $6.05, the company's budgeted farm surplus would be $2.50.

"It underpins that dairy is the best long-run land use."

MyFarm had recently bought three farms for investment syndicates in the South Island, for prices equating to $35 a kg of milksolids and with a $6.05 payout returns would be 6 to 7 per cent.

Fonterra was quick to point out yesterday that nine months of the season were still to come and that the volatility of the exchange rate made predictions difficult.

Chairman Sir Henry van der Heyden warned that the rapidly rising milk powder commodity prices behind the payout rise could encourage other countries to increase milk production.

"We saw this happen in 2007 and we saw how quickly the market can fall as a result."

But the co-operative had enough confidence that the gains would stick even though the global economy remained fragile, he said.

Mr Steel said this indicated that Fonterra had already sold or contracted "a big chunk" of the season's milk supply at the latest high prices.

He would not be surprised to see prices continue to rise.

A $6.05 payout would be a genuine boost to the economy.

"Banks will be breathing easier and even if farmers use it all to pay down debt and shore up their balance sheets it will still lessen the vulnerabilities of regional economies in Waikato, Taranaki, Canterbury and Southland."

Mr Pedersen, a former Federated Farmers leader who converted a sheep and beef farm at Waiouru to dairy last year, said the extra money would go a long way to restoring confidence in the industry.

The debt load was not being carried by farmers alone.

Rural firms had had to agree to wait up to three months before bills were paid.

"Good relationships have been maintained but it's slowed the rural economy down and added to people's stress levels," he said.

- © Fairfax NZ News