30 Jun 2009

Further cut feared in forecast dairy payout

9:31 am on 30 June 2009

Fears are growing that Fonterra may be forced to cut its forecast payout to farmers for the current season.

The group's opening payout forecast of $4.55 cents per kilogram of milk solids was made on 27 May.

Since then, the New Zealand dollar has climbed from its estimate for the coming season of 59 US cents to 63 US cents and export prices have fallen.

Federated Farmers expects prices to drop another 10% - 15% at a monthly milk powder auction on Tuesday.

The primary industry analyst, Agri-Fax, also expects a fall in prices and says pressure will come on Fonterra to revise its forecast.

ASB Bank says up to $700 million could be taken out of the economy if the payout is cut to $4 per kg of milk solids.

Dairy exports account for almost 30% of New Zealand's total exports.

Both the Reserve Bank and Moody's credit ratings agency have recently expressed concerns about the rate of lending to dairy farmers.

Figures issued by the Reserve Bank on Monday show lending to agriculture increased by 42% over the past two years.

This compares to 13% growth in credit to the rest of the economy over this time.

Massey University banking lecturer Claire Matthews says the dairy slump is a problem for the banks.