Farmers upbeat despite dairy payout drop
Confidence in the rural economy remains high, despite Fonterra telling farmers to brace for a 19 per cent pay cut.
Fonterra's announcement yesterday, that it was decreasing this season's record payout by 25 cents per kg of milk solids to $8.40 and forecasting next season's payout to be $7, meant there would be $749 million less in the Waikato economy next season.
This season's 25 cent drop removed $82m from the Waikato economy overnight as the average farmer, whose herd produces 115,211 kg of milk solids, earns $28,802 less for their milk.
If next season's payout remained at $7, the region's 3556 farmers could expect an average pay cut of $187,549 next season, which would amount to a $667m hit to the regional economy.
If this season's payout had remained at $8.65, the average farmer would have earned $996,575 for their milk.
Fonterra's milk price has trended up in recent seasons. It lifted from $5.50 in the 2012-13 season to finish at $5.80. Fonterra then lifted it again to $7 in its opening forecast for the 2013-14 season and it jumped to a record high of $8.65 before it dropped yesterday.
The drop is not as bad as farmers had been expecting.
Last week, some predicted it to fall as low as $6 next season, which would have cost the regional economy more than $1 billion.
West Huntly dairy farmer Glen Ashford thought next season's forecast would be for a $6.50 payout which would have shaved another $57,605 off of his income.
"Seven dollars has put a smile on my face," he said.
Ashford said Fonterra was always going to struggle to match its record high and $7 equalled last year's opening forecast.
Dairy farmers tended to spend three-quarters of their income between now and Christmas on operating costs.
"A lot can happen between now and Christmas and if it can stay up around that $7, I think there would be some good margins and some debt paid off."
He believed the Fieldays organisers would also be happy with the forecast.
"I think if it was below $6.50, farmers might have pulled in the purse strings a bit."
Ashford said he was going to Fieldays in two weeks to buy farm equipment for an equity partnership he was involved in and the forecast would not affect his spending.
"The stuff we are getting we were probably going to have to get in the next 12 months anyway, so we will still be going to Fieldays and looking for a bargain."
Waikato Federated Farmers dairy section chairman Craig Littin said most farmers would have been relieved that the payout had remained at $7.
"I think farmers will be pretty pleased that the opening forecast for next season has got a seven in front of it, not a six."
Littin had hoped the payout would start at $7.
"I think it may be challenging for them to hold that, but I think there was a fair bit of speculation out there and $7 shows a fair bit of confidence by Fonterra."
Seven consecutive drops in milk powder prices on Fonterra's Global Dairy Trade auctions had many farmers worried about the direction the payout would head and the announcement was no surprise, he said. "I think people were relatively well informed that it was going to drop."
The forecast drop comes off the back of another drought.
Littin hoped that the regions dairy farmers had learned to cope with payout volatility over the years and would have structured any borrowing accordingly.
"I would think that most prudent farmers are running their businesses to cope with these fluctuations."