Dairy income cut $800m

A 45-cent cut to Fonterra's farmgate milk price will strip about $800 million in revenue from the dairy industry.

The co-operative yesterday downgraded its forecast for the current season from $4.60 to $4.15, acknowledging it would be "very tough'' for farmers.

Combined with the earnings per share range of 45c-55c, it meant a total available for payout of $4.60-$4.70kg ms, equating to a forecast cash payout of $4.50-$4.55 after retentions.

DairyNZ chief executive Tim Mackle said the on-farm cash incomes of farmers from all milk production this season would be under $4 as a result of the downgrade, as some extra Fonterra payments for this season were shifting forward into 2016-17.

That would have ongoing effects on farmers' cashflows, their business equity and their ability to keep managing debt.

It meant $67,000 less in cash revenue for the average farm producing 150,000kg ms and "hard calls'' would need to be made.

The break-even milk price for the average New Zealand farmer was $5.40, Dr Mackle said.

The forecast revision was in line with expectations and the earlier announced forecast reductions from competitors Open Country Dairy and Westland Milk Products.

ANZ rural economist Con Williams said cashflow was the "life blood'' of any business and the announcement would continue to apply pressure to many dairy businesses' balance sheets well into 2016-17.

Improved cost efficiencies had lowered the industry's break-even payout to the low-to-mid $5kg ms, but that still implied a second year of cash losses for many businesses and continued economic strain in the sector in 2018.

Financial stress would remain high and farmers would be keeping their chequebooks "locked away'', Mr Williams said.

Fonterra chairman John Wilson said global economic conditions continued to be challenging and were impacting demand for a range of commodities, including dairy.

"Key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China.

"In addition, the Russian ban on European Union dairy imports continues to push more product on to the world market,'' he said.

There was still an imbalance between supply and demand, which continued to put pressure on global milk prices.

Since last September, prices on the GlobalDairyTrade auction platform for whole milk powder had fallen 12% and skim milk prices were down 8%.

While New Zealand farmers had reduced supply, that was yet to happen in other regions, including Europe, where milk volumes had continued to increase, he said.

Chief executive Theo Spierings said Fonterra supported the general view that dairy prices would improve later this calendar year.

But the time frame for supply and demand rebalancing had moved further out and largely depended on a downward correction in EU supply in response to the lower prices.

Those prices were clearly unsustainably low for farmers globally and could not continue in the longer term, Mr Spierings said.

Fonterra remained confident that long-term international dairy demand would continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.

Fonterra Shareholders Council chairman Duncan Coull encouraged farmers to sit down with their rural professionals and seek guidance on how best to "navigate through these tough times''.

Dr Mackle said dairy farmers were "extremely resourceful'' and had been taking significant action to manage the past two seasons.

A positive note was that production and homegrown feed supply this summer was good and El Nino had not been as severe so far as some had predicted.

Some reasonable rain in December and January had bolstered pasture and crop growth.

And dairy companies were signalling forecasts so farmers could make important decisions early, like adjusting stocking rates, drying off and preparing for the 2016-17 season.

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