Dairy farmers' incomes could drop by more than $4 billion
this season after Fonterra yesterday slashed its milk price
forecast from $7 to $6.
The dairy giant also announced an estimated dividend range of
20c-25c per share, amounting to a forecast cash payout of
While there was an expectation that Fonterra would reduce its
forecast milk price, the announcement was lower than most in
the market were expecting and would come as a shock to
farmers, Westpac chief economist Dominick Stephens said.
International dairy prices have continued to fall sharply
since Fonterra announced its $7 opening forecast in May, with
the GlobalDairyTrade index declining 16% since the start of
the season on June 1.
Prices have been affected by strong global production, softer
demand, inventory build-up in China with its slowing economy.
A drop in the milk price from $8.40 to $6 this season would
amount to a reduction in the collective income of dairy
farmers of about $4.3 billion, or 1.9% of GDP, Westpac said.
The New Zealand dollar fell US0.2c immediately after the
announcement and the forecast was ''one more reason'' to
expect further downward pressure on it, Mr Stephens said.
Westpac expected the dollar to drop to US84c in the weeks
ahead and it was forecasting an average exchange rate of
US83c over the remainder of the year.
At this stage of the season, the final payout remained ''very
uncertain'' and much would hinge on how GlobalDairyTrade
auctions evolved over the few months ahead.
Westpac was assuming a small further reduction in auction
prices over the next ''month or two''.
A ''very substantial'' recovery in prices was expected but
not until the last quarter of the year, he said.
Fonterra chairman John Wilson said the drop in the forecast
milk price would have an impact on farmers' cash flows.
''We continue to urge caution with on-farm budgets in light
of the continuing volatility in international dairy
markets,'' Mr Wilson said.
Earlier this month, Federated Farmers dairy chairman Andrew
Hoggard said a $6 payout was the practical break-even for
about 20% of the industry with high production costs.
Fonterra chief executive Theo Spierings said some recovery in
global dairy prices was forecast but it was too early to
predict when, or how big in might be.
As Fonterra continued to drive for growth in its consumer and
food service businesses, during the first half of the current
financial year it expected reduced cost of goods arising from
lower dairy commodity prices to have a positive effect on
returns, Mr Spierings said.
''It is important to note that in light of the significant
volatility, our dividend estimate is based on zero
ingredients stream returns at this early stage in the
season,'' he said.
The dividend expectation had been lifted from an indicated
10c for the 2013-14 season.
ASB had been anticipating some rise in the dividend given the
shift to a more favourable mix of higher cheese and casein
prices relative to milk powders.
The reduction in milk prices also reduced input costs for the
value-add businesses, chief economist Nick Tuffley said.
Dairy farmers' confidence moved into negative territory in
Federated Farmers recent new-season confidence survey.
They experienced a massive 87-point fall in profit
expectations, going from being very optimistic to very
pessimistic in the space of six months.