28 Jan 2016

Latest drop last straw for some - Fed Farmers

8:36 pm on 28 January 2016

The cut in Fonterra's forecast payout is likely to push more people out of the dairy industry, Federated Farmers dairy chairperson Andrew Hoggard says.

Fonterra is forecasting a payout of $4.15 a kilo of milk solids, down from the previous $4.60 and from $5.25 at the start of the season.

It was the third company to drop prices into the low $4 in the past three weeks: Open Country Dairy's forecast was between $4 and $4.30, and Westland Milk Products was between $4.15 and $4.45.

The drop was not unexpected by dairy farmers, but what concerned them was how long prices could remain low.

In February two years ago, Fonterra's forecast was at $8.65, but now farmers were staring down the barrel of possibly a third season of low prices.

Mr Hoggard said he wasn't hearing signs of recovery until at least 2017, and people were already exiting the sector.

"I'm hearing stories of people that are pulling the pin and sharemilkers that are getting out while they've still got some equity, and potentially others will be looking at moving on," Mr Hoggard said.

"It will just add to the pressure for people looking at other options."

Federated Farmers vice president Andrew Hoggard

Federated Farmers vice president Andrew Hoggard Photo: Radio NZ / Jemma Brackebush

The drop in price would be a shock to many according to Don Fraser, a former rural banker and now farm adviser who arranges leases for dairy farmers.

"Most farmers can't seem to get much under that $3 (a kilo) farm running costs - so you've got $3 gone before you start - average debt's about $30 a kilo and if you put that at 6 percent, that's another $1.80 so we're $4.80 and we haven't got a feed for the family (yet)... it's pretty tough," Mr Fraser said.

Mr Fraser said he could not see how dairy farmers would be able to make further cuts - and that would create some big issues.

This morning's news would put even more farmers under pressure, according to Matthew Zonderop, who milks 200 cows near Matamata in Waikato.

"It's not a good way to wake up. What can we do? We can't change it, we've just got to keep going on," Mr Zonderop said.

His business was barely breaking even.

"We're on a knife edge. If we have a breakdown somewhere that'll tip us over a little bit. We're okay as far as discussions with the banks are concerned at the moment," he said.

Farmers and sharemilkers had already sold up and left the industry as a result of the low prices, he said, and Fonterra must seriously consider driving more milk into value added products.

"Farmers have been saying this for a number of years, 'it's time we look at value add' and we've missed that boat and we're going to pay the price."

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Photo: 123rf.com

It was the second consecutive season of low payouts and for sharemilkers such Jono Bavin, who said it was almost like working for nothing.

The Southland farmer, who is a 50:50 sharemilker at Tussock Creek, said the impact of the low payout had flowed through to the community.

"I've just had a guy do a quote for concrete and he's dropped his staffing numbers from 15 down to four just due to the low payout," Mr Bavin said.

The flow-on effect to the rural towns was just starting to be seen now, he said.

Fonterra chairman John Wilson said contributing factors included a slow recovery in Chinese demand, increased milk production in the European Union and declining oil prices.

The company expected prices to lift towards the end of the year and it was forecasting a lift in dividend to help suppliers, Mr Wilson said.

"Fonterra's performance is very strong. The co-operative's balance sheet is strong and we're still on track... to deliver a significant improvement in dividend over last year. We'll discuss that with farmers when we get to the half year in March."

Mr Wilson said banks had told Fonterra they would support struggling dairy farmers, as they understood the long-term future for dairy was strong and this was a unique set of circumstances.

ANZ rural economist Con Williams said Fonterra's forecast payout may have hit bottom, but there were risks that could drag it down further.

The tough overseas conditions posed the greatest risk, he said.

"Looking at it at the moment - (I) struggle to see prices punching too much lower," Mr Williams said.

He believed prices were now at some kind of a base, but he would not rule out prices falling further with evolving offshore dynamics.

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