29 May 2014

Farmers cream productivity profit

8:01 am on 29 May 2014

ANZ Bank economist Con Williams says many people are overlooking the huge improvements in productivity dairy farmers have achieved recently.

Fonterra on Wednesday set next season's initial forecast farmgate milk price at $7 per kilo of milk solids, which was higher than some had expected.

However, the dairy giant has cut this season's forecast payout by 25 cents to $8.40 per kilo of milk solids. That would reduce farmers' incomes by nearly $400 million but Mr said it represented just a little less cream from what was still a record payout.

The average annual yield per cow was close to 381kg of milk solids - a new record and about 7.5 percent ahead of trend.

"I think a lot of people are missing the productivity story that the sector's gone through maybe in the last five to six years, and that's really paying dividends for them at the moment," Mr Williams said.

"Production is going to be up around 10 percent for the season just finishing, and that's a remarkable bounceback from the drought."

Mr Williams said he believed it could be a good thing from a long-term perspective that there was a lower payout next season compared to this season.

"I don't think you want to see a lurch in investment, and also too much pressure on land values," he said.

"That can lead to over-investment and over-supply, which can lead to under-shooting of prices further down the track, and that can wreak a bit more havoc so a more steady farmgate price at around current levels ... we think's pretty good for long-term investment and making sure that that's sound."

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