Fonterra payout cut a blow to economy
The region's economy will be hit hard by Fonterra's decision to slash the projected dairy payout by $1 to $6 per kilogram of milksolids, Federated Farmers' Manawatu/Rangitikei president says.
James Stewart, a dairy farmer at Hiwinui near Palmerston North, said the fall was more extreme than he had anticipated.
It will take millions of dollars out of the region. The average farm will lose more than $100,000 with the drop in payout.
"So farmers are bracing themselves. We all know we're in for a bumpy ride with the volatility of global prices."
He said one of the hardest things was the fall from last year's payout of $8.30.
Stewart said the fall meant farmers would look at all costs and how they could cut them.
"And the wider region will feel it. Farmers will have to re-look at their budgets."
But he said dairy farmers had been there before, with the payout two years ago of $5.80/kg, and they would cope again.
"We're hoping for a very productive year on milk to help make up for the lower payout."
The federation's dairy section national head, Andrew Hoggard, also from Manawatu, 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."
Nationwide, it is a $1.65 billion hit to the economy.
A 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 also surprised Waikato Federated Farmers dairy chairman Craig Littin, who hoped the forecast would be $6.50/kg MS.
The lower forecast reflected continuing volatility and declines in the GDT, Fonterra's chairman John Wilson said.
"We have seen strong production globally, a build-up 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."
Fonterra will update its business performance when the co-operative announces its annual result on September 24.