2009-01-28

Fonterra revised payo, ‘tough but manageable for farm businesses’

Fonterra revised payout, ‘tough but manageable for farm businesses’

“The detail behind the latest revised forecast payout figure of $5.10 per kilogram of milksolids (kgMS), for the 2008/09 season, means it will be tough but manageable for well run farm businesses,” says Lachlan McKenzie, Federated Farmers Dairy chairman.

“This comes at a time when there is a glimmer of light appearing at the end of the tunnel for other commodities and the revised payout is still the third best payout this decade. While the revised payout will be tough on some farm businesses, the majority are well managed and moderately geared. The fundamentals for dairy remain extremely good so while this revision is disappointing, it is not a calamity.

“While Fonterra’s revision to its forecast payout since last September has slashed export receipts and the income of New Zealand’s dairy farmers by around $1.8 billion, this has coincided with an implosion in commodities generally.

“The devil for supplier shareholders comes with them effectively bankrolling Fonterra for some five months, in the case of the advance payout and six months, for the value return component.

“The first part of the value return component, due in April, has been folded into one payout, which now comes in October. Given the current forecast for this component, a large chunk of the half billion dollars farmers would have budgeted for in April has now gone.

“The second unpleasant surprise comes with incremental payouts being delayed until the end of the season in June. Each month, dairy farmers receive a baseline payout of $4.05 with an increment on top of moving towards the final payout. This increment would have formed part of farmer budgets but this has been pushed back into June onwards

“The interest costs for farmers bankrolling Fonterra will mean the effective payout in the hand for farmers will be less than the $5.10 figure estimated.

“This is not just unprecedented, it will require some farmers to immediately call their banks to arrange or extend overdraft facilities. This will impact the economy at many levels.

“In light of our concerns over banks farming farmers with business overdraft rates, the Federation will be writing to the regulators. Clearly, liquidity will be essential for farmers who will now have to undertake major revisions of farm budgets.

“It is also to the Board’s credit that Fonterra seems to have listened to Federated Farmers call for them to under promise and over deliver on the revised payout, if current market conditions do not deteriorate. If being a small word, however, with a very large meaning,” Mr McKenzie concluded.

Related Article from the New Zealand Herald

Economy takes $1bn dairy hit

The payout to dairy farmers has fallen dramatically.

The payout to dairy farmers has fallen dramatically.

Wednesday Jan 28, 2009

New Zealand's economy has been dealt a blow, with confirmation our largest exporter and biggest corporate, the dairy giant Fonterra will again cut its farmer payout, costing the country a billion dollars.

The co-operative today announced that the forecast dairy payout for the 2008-2009 year has been cut to $5.10 per kg - a reduction of 90 cents on the previous forecast of $6 per kg of milksolids.

That reduction will slice more than a billion dollars off many dairy incomes and therefore out of the New Zealand economy.

In December Fonterra chairman Henry van der Heyden warned that a continuing fall in international commodity prices, fluctuations in the New Zealand dollar, and the worsening effects of the global financial meltdown meant a cut was increasingly likely.

Economists were forecasting a figure today of between $5 and $5.50 per kg.

Based on last season's collection of 1.19 billion kg of milksolids a 90c cut means a loss to the economy of more than $1bn.

Fonterra's available payout last season was a record $7.90 per kg. Originally Fonterra was expecting to payout $7 per kilo this season. A fall to $5.10 means an expected $2.28 billion injection into New Zealand's economy will not happen.

The Fonterra Shareholders' Council, which represents the interests of the farmers to the co-operatives board, issued a news release saying it was "disappointed by the magnitude of the drop" in the forecast payout.

Council chairman Blue Read said although the Fonterra had signalled that global financial and market conditions were putting pressure on payout, the 90 cent drop announced today would still have surprised many Fonterra farmers.

"After a record payout last year, we went into the season with a payout forecast of $7.00 per kilogram of milksolids. We are now confronted by a reduction of more than 25 per cent in our farm revenues for the season.

"Dairy farmers are used to fluctuating forecast adjustments and the uncertainty this creates but in this environment we would like to see more timely updates.

"These are challenging times and like many New Zealanders, Fonterra farmers are feeling the pinch," said Read.

Asked what proportion of Fonterra's farmers would be put under financial stress by the fall in payout, chief executive Andrew Ferrier said he couldn't give a specific number, "but Kiwi dairy farmers are incredibly resilient and they know how to tighten things up when prices go down, so obviously the vast majority of farmers will be able to ride this out.."

Chairman van der Heyden said cashflows would be stressed by the reduction.

"Look this $5.10 is going to put a good number of farmers' cashflows under significant pressure. Make no bones about that and I understand that."

"But at the same time, Andrew's [Ferrier's] point about farmers is that they are resilient and that's why we're giving the message as clearly as we can. But there are one or two little things starting to head in the direction in favour of the farmers as well."

Interest rates were coming down and the first signs of farmer input costs coming down - including fertiliser and fuel, were now being seen.
"But I do want to stress that this will put a good number of farmers' cashflows under pressure."

Asked if the payout would have been higher had it not been for the EU's re-introduction of subsidies for its dairy farmers, Ferrier said it was hard to say by how much.

"I don't know if we'll ever know if it would have been higher.
If the subsides are not a material impact on the market, we could be above $5.10."

The market, said Ferrier, "anticipates these things" and there had been a material drop in prices in the past few weeks, following the EU move.


CHRIS DANIELS/HERALD ONLINE

Fonterra company video: Milk payout drops



6 comments:

  1. We are heading into some lean times ourselves too. Our milk price was around $16 cwt and now it looks to be around $10 cwt. I think it will be rough until the price recovers, here in the US and NZ. It will be interesting...

    Jennifer

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  2. I expected this figure Jennifer and it will go lower. Not good for anyone in the rural sector but people bounce back or they wouldn"t be farming.

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  3. Yep, similar announcement made The Weekly Times here in Oz a couple of weeks back.
    It's going to get a lot worse before it gets better.

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  4. That's what worries me Jayne. There'll be a few people walking off the land. Global prices have been dropping on whole milk powder they'll bottom out somewhere but how low they go at this point is hard to know. One thing I do know here in the rural areas people are already hurting badly. Our community is feeling the pinch some families are thinking about moving to Auckland to get better opportunities. A sad fact of economic cycles.

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  5. Isn't it always the same in farming. The situation is just the same here in the UK. They do away with subsidies and give us a Single Farm Payment = then they begin to cut the price of milk and the cost of feed and fertiliser goes up astronomically. No wonder young people no longer want to farm.

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  6. Just read about the NZ real estate and dairy specialist PGG Wrightson closing up its Aussie offices :(

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