West Coast dairy farmers have been hit with notification of a 20% drop in their payout this year, reflecting deepening countrywide concerns over the plummeting global price of dairy products.
While Westland Milk Products may not have the benefit of market share and economies of scale of dairy giant Fonterra, its belt-tightening is indicative of the troubled times ahead for the recently booming sector.
An income loss of $1 from every $5 could be the tipping point for new-entrant farmers paying off huge mortgages and expensive conversion costs.
Having underpinned the economy for the past three years and cushioned some of the worst effects of falling house prices, dairying is now grappling with its own increasing production costs as record commodity prices have fallen back by as much as 50%-60% for some products.
Hokitika-based exporter Westland Milk Products' 385 dairy farmers, spread down a thin coastal strip from Karamea to Franz Josef, have been advised of the 19%-21% fall in payout, Westland acting chief executive Hugh Little confirmed when contacted yesterday.
"Following a board meeting, it was decided to notify our farmers. They need to know what we know as soon as possible," Mr Little said.
Westland had forecast a milk-solids per-kilogram payout of $5.20-$5.60, but that has been downgraded to $4.10-$4.50 per kg - a cut of between 21%-19%.
By comparison, Fonterra slashed its forecast per-kg payout by 60c to $6 in November and in mid-December cut its fair value share by almost 20%, or $1.10 from $5.57 to $4.47.
While the West Coast's financial loss will run to millions, Fonterra's loss to the economy overall will count in the billions.
National Bank rural economist Kevin Wilson said market expectations during the next 12 months were for global dairy prices to settle around pre-boom prices of $US2200 ($NZ3814) per tonne.
"Commodity prices tend to overshoot on the way up, and overshoot on the way back down," Mr Wilson cautioned.
Mr Little blamed the fall in global commodity prices, from $US4500-$US5000 per tonne for some products, to more recently $US1700-$US2200 per tonne, for having to slash the payout.
When asked if there were ramifications for the 330 staff, he said the operation was "already lean and mean" and global commodity prices would be reappraised in the New Year.
Westland Milk Products
The company: Independent co-operative dairy company producing milk powders, butter, milk protein concentrates and nutraceutical products from Hokitika.
The people: 330 employees; 385 farmer-suppliers.
Exports: 85%-90% of its products, from 46 million litres of milk this year.
Turnover: 2007, $300 million; 2008, $500 million.
Asset value: $340 million.
