29 Aug 2012

Dairy farmers tighten their belts

3:27 pm on 29 August 2012

Dairy farmers say they will be tightening their belts and cutting costs to cope with the latest drop in Fonterra's projected payout.

The co-operative has reduced its forecast milk price by a further 25 cents on the opening price for the current season, to $5.25 per kilogram of milk solids, and lowered its forecast dividend by five cents a share to a range of 40-50 cents.

Fonterra chairman Sir Henry van der Heyden says the high New Zealand dollar is mostly to blame as it erodes recent gains seen in international dairy prices.

A large-scale Canterbury dairy farmer Bryan Beeston, who milks 3000 cows on three farms south of Ashburton, says the latest payout cut will blow his budget, which was already tight.

He estimates that combined with the reduced opening forecast for the season, it will cost him about $400,000 in farm income.

Mr Beeston says the drop in payout also hits the rural economy through reduced spending on farm services and retailers in rural centres.

Waikato dairy farmer, James Houghton, who's also the region's Federated Farmers president, says there's hope that international dairy prices will continue to lift, taking pressure off the milk price.

But in the meantime, he says farmers will be putting away the cheque book to ride out the down turn.

Fonterra's farmer shareholders' council chair Ian Brown is putting a more positive spin on it.

Farmer resilience and some early signs of a turnaround in commodity prices should help to soften the announcement, he says.

And a 17% improvement in Global Dairy Trade prices in the last quarter is a positive sign that improvement may be just around the corner.

But Federated Farmers dairy chair Willy Leferink says the 30 cents/kg drop in Fonterra's projected payout range this early in the season will hurt.

He says the cut follows Westland Milk Products cutting its projected payout by 70 cents, reducing it to an estimated range of between $5 and $5.40/kg.

Mr Leferink says average farm working expenses, before interest and tax, are about $4.20/kg of milk solids, so the reduced payouts leave little or no "freeboard".

He is advising farmers scale down budgets to allow for a $5/kg payout and dust off emergency budgets from the 2008-9 season as a further guide.

Much of payout services $40bn debt - Labour

Labour Party primary industries spokesperson Damien O'Connor says total dairy industry debt has been assessed at $40 billion, and a large part of the milk payout is needed to service that debt.

He says with ever-increasing costs of production, many farmers will be squeezed by payouts below $5.50/kg.

"There's a small portion very highly indebted, there are of course a number who are secure, have been cautious," says Mr O'Connor, "but there are a growing number who have invested in the dairy industry, are optimistic about the future, but need a reasonable payout to service that debt and to make a profit."