Dairy farmers wary of inflation

Dairy farmers are not rushing out to buy brand new utes on the back of a high payout.

Fonterra has come in for praise for increasing its forecasted milk price range last month from $7.25 to $8.75 a kilogram of milk products to $7.90-$8.90/kg ms.

The extra 40c/kg on the midpoint price of $8.40/kg would equal the co-op’s highest payout.

Federated Farmers South Canterbury Dairy chairman Ads Hendriks said farmers happy with the rise would still be wary of inflation and businesses taking the opportunity to lift their prices.

He said farmers might react by securing a year’s supply of supplements to mitigate this risk.

‘‘For some people the 40c might be easy money coming out of the back, but as soon as the payout goes up the other businesses put their prices up and when the payout goes down you don’t see them dropping their price until it gets tough.’’

Mr Hendriks said this would prevent farmers from lashing out and buying new tractors or trucks.

‘‘Most of them will make sure they are financially strong to weather all these changes that will be coming. The best way is to reduce your debt. We’ve had a couple of good years with low interest rates and that’s helped with paying the bank back.’’

Farmers still struggling with environmental and regulatory obligations had other changes to deal with — and until recently were losing migrant workers because of tough residency rules

Mr Hendriks said the challenge would be if Fonterra’s chief executive Miles Hurrell could keep the dividend range of 25c-40c/kg range as its biggest cost — milk — had now gone up in price.

Mr Hurrell has told farmers that other regions had stepped in to offset easing demand from China over the past few months.

He said supply growth was tracking below average levels, driven by a production slowdown in the United States due to increased feed costs.

“While the increase in milk price can put pressure on our input costs, we remain comfortable with our current 2021-22 earnings guidance range of 25c-40c per share.”

The plus or minus 50c range in the forecast reflected the uncertainties of Covid 19, inflation, exchange rate volatility and the weather.

Mr Hendriks said back-to-back high payouts were not always appealing because it led farmers to increase their herds and feed cows more to get more milk.

He said it was a good thing that high feed costs would reduce this risk as no-one wanted a market flooded with milk and the price crashing.

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