28 Mar 2013

Claim Fonterra payout increase won't cover drought costs

8:07 am on 28 March 2013

Some dairy farmers say the increase in Fonterra's milk payout forecast won't be enough to cover the costs of the drought.

The dairy co-operative has lifted its forecast farmgate milk price for the current season by 30 cents to $5.80 a kilogram of milk solids, with a dividend of 32 cents a share on top of that.

The higher forecast is on the back of 33% boost in Fonterra's half-year net profit to $459 million.

Fonterra Shareholders Council chair Ian Brown, who farms in the parched King Country, thinks the increased payout forecast will be enough to cover most farmers' needs.

He says the increased cashflow should allow farmers to source feed to get cows back into the right condition for calving, and to use feed or fertiliser if required to ensure the effects of drought don't roll over two years.

Mr Brown says the increase should go a fair way towards covering the costs and will give farmers confidence that Fonterra is looking after their interests.

But Federated Farmers says it will not be enough to make up for the effects of the drought in the North Island.

Dairy vice-chairperson Andrew Hoggard says he would need an increase of 50 cents a kilo just to offset the drought.

He expects milk production on his Manawatu farm to be 10% down by the end of the season.

Mr Hoggard says farmers have already spent the $100,000 on average that Fonterra says they will get due to the faster advance rate paid and the forecast payout increase.

Waikato University professor of agribusiness Jacqueline Rowarth agrees that the increased payout forecast will not cover the costs of farmers battling drought.

She says the increase to $5.80 per kilogram of milk solids is still not covering the average cost of production, which is nearer to $6 per kilogram including debt repayment and compliance costs, at least in Waikato.

She says the fact the share price has gone up will also mean the dividend has gone down from about 7% last year to about 5%, which barely covers the cost of capital.

Professor Rowarth says having a forecast milk payout that is below the cost of production will make the declining milk supply worse, as more farmers are likely to dry off their cows earlier.