Milk production is expected to rebound after last season's
drought, compounding gains for farmers from an expected
increase in payout. Photo by Peter McIntosh.
A 50c increase in Fonterra's forecast milk price for
2013-14 has been described as an ''overdraft clearer'',
allowing farmers to pay back credit lines extended to them
during widespread drought.
Yesterday, the dairy giant announced it had lifted its
forecast farmgate milk price to $7.50, with an estimated
dividend of 32c per share, amounting to a forecast cash
payout of $7.82, reflecting continuing strong international
prices for dairy.
The co-operative also confirmed a further increase to the
advance rate schedule, starting from $5.50kg ms.
The forecast payout lift, combined with an expected rebound
in production, represents a sizeable boost to New Zealand's
The $1.70 lift in the milk price [from last season] and a 5%
lift in production would boost the economy by about $3.4
billion, or about 1.6% of nominal GDP, compared with the
2012-13 season, Westpac economist Nathan Penny said.
Fonterra's most recent forecast for annual production growth
sat at 2% but the bank was ''more bullish'' and predicted 5%
growth, Mr Penny said.
Federated Farmers dairy chairman and Mid-Canterbury farmer
Willy Leferink advised farmers to ''bank the gains and run a
Drought was a major factor behind farm debt growing to about
$51.7 billion. Much of the forecast, if it stuck, would go to
paying down those credit lines, Mr Leferink said.
The forecast increase was also a ''beautiful opportunity''
for farmers to build up cash reserves to further improve
water quality, Mr Leferink said.
A high milk price could be a ''double-edged sword'' for
Fonterra's overall performance, as it generally meant the
cost of raw ingredient also increased.
''We believe there will be a lot of pressure on Fonterra to
come up with a substantial dividend but a high milk price
will put pressure on margins. That is not necessarily a bad
thing, as it will drive the company to perform,'' he said.
DairyNZ chief executive Tim Mackle said the payout translated
into another $845 million circulating in the national economy
However, he also warned it was ''just a forecast''. It was
still very early in the season and things could quickly
''Remember, we started off with a hiss and roar last season
in terms of milk production, and ended up with the worst
drought in 70 years. It highlights the need to keep planning
and monitoring to make the best decisions.''
Dr Mackle agreed many farmers would use the payout forecast
to pay off debt. While the level of farm debt servicing was
about twice today what it was a decade ago, the distribution
of that debt was not uniform.
About 20% of farms had virtually no debt while another 20%
carried 45% of the debt, so the level of payout forecast was
obviously more significant for those carrying a lot of debt.
Farm working expenses now averaged about $4.30 to $4.50/kg ms
and, coupled with the extra costs incurred to service the
higher average debt levels, many farmers needed good milk
prices to build resilience and strength into their
''Essentially growth in farm operating expenses and debt
servicing has roughly matched growth in income, despite
improved milk prices. The high advance rate also helps
farmers with cash early in the season when they need it
Given the volatility of the market, Fonterra Shareholders
Council chairman Ian Brown also urged farmers to still be
prudent in their financial planning.
At the start of this season, Fonterra forecast that dairy
commodity prices would continue at or near current levels
until the fourth quarter of 2013, chairman John Wilson said.
However, supply constraints in Europe and China during the
northern hemisphere spring had contributed to an increase in
prices of 3% over the past two months. In addition, the New
Zealand dollar had weakened against the US dollar.
International dairy trade growth was being led by strong
demand for powders (combined whole milk and skim), chief
executive Theo Spierings said.