This evening’s confirmation that Fonterra Cooperative Group is standing by its $6.60 per kilogram of milksolids (kg/MS) forecast for the 2010-11 season, comes as major relief for dairy farmers in the wake of the Greenback closing at two year lows against the Kiwi.
“Farmers are acutely aware the United States dollar is now a major factor in the payout,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.
“I think there was some worry of a downwards revision, so news that Fonterra is standing by its current 2010-11 forecast is a huge relief.
“The best news is that the Cooperative, through firm sales, is able to give farm cashflow a shot in the arm by increasing the Advance Rate schedule by $0.30 kg/MS.
“As this will come in the November payment, it will enable farmers to make good investment decisions. How wise these have been came just over a week ago, when Fonterra processed a record 76.8 million litres of milk in a single day.
“But Federated Farmers now assumes in-season volatility of $2 kg/MS, hence the need for farmers to be conservative with their farm budgets.
“We endorse Sir Henry van der Heyden when he said there is always potential for both downside and upside in the forecast. The priority for farmers is really debt retirement and productive on-farm investment.
“But the gorilla in the room is the direction of the US dollar that is now at two-year lows against the Kiwi.
“The Kiwi has only broken clear of the psychological US80 cent barrier twice in the past 25 years. I guess the difference now is that the US economy is in a more parlous state.
“The truth is that currency hedges can only shelter you for so long. This isn’t a strong Kiwi story as opposed to a weak Greenback, with more potential to get weaker through quantitative easing.
“It’s vital that councils, Government and suppliers realise exporters are walking a proverbial tightrope called the US dollar. Expectations need to be kept well and truly in check as the season isn’t even half-way through,” Mr McKenzie concluded.