24 Sep 2014

Low milk payout will start to hurt - farmer

6:15 pm on 24 September 2014

A South Canterbury sharemilker is warning further reductions in dairy company Fonterra's payout will start to hurt the industry - particularly those new to it.

Fonterra chairman John Wilson and chief executive Theo Spierings.

Fonterra chairman John Wilson, left, and chief executive Theo Spierings. Photo: RNZ / Kim Baker Wilson

Fonterra revised down its forecast for this season when announcing its annual results today, slashing the predicted payout from $6 per kilo of milk solids to $5.30. However, it confirmed its record payout for last season's milk of $8.40 per kilo of milk solids.

South Canterbury sharemilker Ben Jaunay said the reduced payout meant he was at break-even, and any further reductions would require taking on more debt to keep his head above water.

Any further reductions could start to hurt, he said.

"There's no surplus at the current level. If it goes lower then obviously we're going to need the support of the banks.

"Luckily I've been sharemilking for a while so I've got the money still coming in from last season whereas the new sharemilkers for this season, they haven't got any retained earnings coming through from last season."

The annual results illustrated how good conditions for the company were not necessarily ideal for its farmers.

While Fonterra's net profit fell 78 percent during the past year, its farmers were laughing all the way to the bank - receiving an unprecedented $8.40 per kilo of milk solids and a 10 cent dividend as the cream on top.

This year, with global dairy prices tanking, Fonterra's expecting the value-added side of its business to be far more profitable and has roughly tripled its dividend forecast from last season; it now sits between 25 and 35 cents.

However, the milk price paid to farmers is plunging.

Despite that, Fonterra chairman John Wilson said farmers should celebrate today's annual results.

"Well the critical thing is we've had a very, very good year for Fonterra, for our farmers and very much so for New Zealand with the money that has flowed through our rural economies."

Mr Wilson conceded the falling payout to farmers this season meant they could be in for a rough ride.

"There's no doubt that the impact on our farmers cash-flows, which we're acutely aware of, as we go through November, December and then into the next part of the next calendar year...January, February, March...is going to be significantly back on what our own farmers had been forecasting, their own cash-flow budgets.

That will have an impact on our farmers," he said.

Anchor Milk. Fonterra products

Photo: RNZ / Diego Opatowski

Farmer response

Federated Farmers dairy section mid-Canterbury president Jessie Chan-Dorman said most farmers would have seen the writing on the wall and costed in the dramatic fall in the projected milk payout for this season.

She said they would have paid down debt and bought machinery when the payout was high and would be winding back on those things now it was low.

Ms Chan-Dorman said farmers would be hoping there was not a repeat of last year's drought as that, combined with a low payout, would present a perfect storm.

Federated Farmers dairy chair Andrew Hoggard said the size of the reduction meant up to a quarter of dairy farmers may make a loss this season.

"In terms of where farmers are placed, most farm working expenses average around $4 per kilogram of milk solids, so there's a range of about two thirds of farmers between $3.25 and $4.75 and the Dairy NZ economic group expects that around 20 to 25 percent of farmers will be at risk of needing to get outside funds to get them through the next season, so more borrowing.

"When you add up farm work and expenses, plus interest and any rent payments it comes out to a total cash cost on average of $5.40. So, at $5.55 (the milk payout plus dividend), most farmers will be making a few cents (per kilo). Obviously there are a few with low costs, they'll still be doing well, but there will be some who will be making a loss this season."

Mr Hoggard acknowledged Fonterra's confirmation of last season's record $8.40 payout plus 10 cent dividend would provide some relief to troubled farmers.

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