Fonterra windfall best used on debt

South Canterbury Federated Farmers remains cautious despite another healthy Fonterra forecast payout.

The forecast farmgate milk price has increased 35 cents to a record $8.65 per kilogram of milksolids.

The increase - along with a previously announced estimated dividend of 10c per share - brings the total forecast cash payout to $8.75.

It follows a 50c hike on September 25, a 30c rise on August 27, and a 50c increase on August 1.

For the average South Canterbury dairy herd of 780 cows, milking 390 kilograms of milksolids (kg/MS) per cow, it equates to an extra $106,000 in income and an extra $26 million coming into the district.

While South Canterbury Federated Farmers dairy chairman Ryan O'Sullivan said it was good news for the economy, he warned of bigger risk while prices remained high.

"This is not sustainable year in and year out. All the other dairy farmers around the world will look at this and increase production; volatility is reality."

Mr O'Sullivan said it was not wise to budget on an $8.75 forecast.

"Banks will be budgeting on $6.50 to $6.70; the supply and demand will ease next year. The longer these prices stay up then the bigger the risk; global production will go forward."

It was a good time for those in a highly geared position to pay down debt, he said.

South Canterbury Chamber of Commerce president Tony Howey said it would be prudent for farmers to pay down debt.

"At the the moment debt levels are relatively high and interest rates are low so that's good, as long as interest rates don't jump.

"There are always cycles and cycles turn; I understand Fonterra are holding some back and could be paying more, which is a prudent thing to do. The whole dairy thing is good for the provinces, particularly for South Canterbury, as we have good soil and water, and good production."

Fonterra's latest forecast was 70c lower than the $9.35 milk price derived with the milk price manual, chairman John Wilson said.

The board had the discretion to pay a lower farm gate milk price than that specified under the manual, if it was in the best interests of the co-operative, he said.

The Fonterra board also approved an increase in the advance rate schedule of monthly payments to farmer-shareholders.

Payments from March through to June would be 25c per kg of milksolids higher.

The Timaru Herald