9 November 2009

Revised Fonterra payout provides farm and economic relief

Federated Farmers is excited by the news that Fonterra is revising its 2009/10 season forecast to $6.05 per kilogram of milksolids (kg/MS). The second upwards revision since the $4.55 kg/MS season forecast was announced in May and reflecting a surge in dairy commodity prices.

“There will be an audible sigh of relief from all dairy farmers as this provides a key marker for all dairy farmers irrespective of whether they supply Fonterra or not. Anything over $6 kg/MS is historically very high,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“The rapid appreciation of whole milk powder, up 50 percent in just two months, is frankly unprecedented. While it’s too early to crack open that celebratory carton of milk, Federated Farmers is pretty certain this figure has a solid feel to it.

“Farmers will be more than relieved. Increased farm costs and the impact of council rates meant the $4.55 kg/MS season forecast translated into a cash loss for the average dairy farm according to the Ministry of Agriculture and Forestry.

“The recent upward revisions, the first on 27 September and now today, means the average dairy farm will now be looking at a cash surplus. Economically, this news provides yet more evidence for the Government to pull back its domestic stimulus

“This news also backs the comments of former Labour Party President, Mike Williams, on Q+A yesterday who said that food production and ample water is New Zealand’s economic salvation.

“I think Treasury needs to take a forensic look at the anti-dairy policies emerging in some of the largest regional councils. Farmers need consistency and clarity and without it, the dairy sector’s growth and economic contribution will be seriously impaired.

“On-farm, farmers are trying to crawl back their overdraft limits after months of minimal income. We’re only now hitting summer production averages.

“For the majority of farmers carrying little debt, I imagine they will be looking to bank their gains with the final payout next year.

“For the minority who are highly geared, we anticipate both them and their bankers will be prioritising debt reduction to get their balance sheets into some form of order.

“I think the exuberance dairy got caught up in over recent years is now history.

“As a FAME scholar in 2007, I predicted the long term average for milksolids would be $5.50 but with $2 of volatility. After all last season, we started with a $7 forecast before the commodities implosion took it rapidly down from $6.60 before finishing at a final payout of $5.20 kg/MS.

“The rollercoaster ride we’ve seen over the past few seasons underscores the need for all dairy farmers to be more conservative in the running of their businesses,” Mr McKenzie cautioned