Waikato farmers and the wider agricultural industry are bracing for another deep cut to this season’s dairy forecast.
Fonterra will update its forecast payout for the 2014-15 season tomorrow when it announces its annual result.
A drop to $5.20 from the record-smashing $8.65 payout last season would suck $800 million from the Waikato economy alone, AgFirst agricultural economist Philip Journeaux says.
«If it drops to $5.20 then the average farmer is running at a loss, so they would have to cut back on expenditure reasonably significantly just to break even,» he said.
«It takes a bit of time for it to flow through, if you like, but at $5.20 at the farm gate you’re probably going to see a drop of $800m for the Waikato.»
A $5.20 payout would shave about $85,272 off the average income for a Waikato dairy farmer with a 323 cow herd milking 330kg of milk solids (MS) per cow.
Morrinsville farmer Keith Holmes said a payout fall could be catastrophic for rural communities.
«The way farming is structured these days, no farmer can make a profit below a $6 payout.»
He predicted a new forecast of between $5.50 and$5.80/kg MS tomorrow.
Holmes had revised his budget for this season. There would be no extra spending, and supplementary feed would be bought only if it was affordable.
Many farmers would also be feeling the lingering effects of the droughts of the past two seasons. It ate into cash flows despite the high payout, he said.
«This is quite a serious situation. We have a bit of a buffer from last year’s payout coming into this year, but it will really knock the confidence of farmers.»
Gaynor Tierney, who farms just north of Hamilton, was budgeting on a $5.50 payout this season. The talk among other farmers was an expected fall of around 25 cents.
«If it falls any more than that, there’s going to be some pretty miserable-looking people.»
Other farmers expected a low price that would lift again as the season progressed.
«We have been so used to getting these big increases in payout as the year goes forward that everyone has it in their mind that that’s what is going to happen. The reality is that it probably won’t.»
The forecast slash in payout comes on the back of a steadily dropping milk commodity price on Fonterra’s GlobalDairyTrade (GDT) auction.
University of Waikato professor of agribusiness Jacqueline Rowarth said pressure would mount on the dairy giant if it maintained its current strategy of providing more milk while the price was low on the GDT.
«Is Fonterra playing a smart game? Questions are certainly being asked about that,» she said.
Money from the record payout had already gone into debt repayment and new compliance costs, so a low payout would be «crunch time» for farmers.
Waikato Federated Farmers president Chris Lewis agreed.
«There’ll be a lot of stress out there. There’s no doubt about that.»
Lewis said farmers would also be watching the dividend forecasts carefully tomorrow.
«They [Fonterra] have always said a high payout, low dividend.
«So if the farmers and the market doesn’t see that dividend being very, very high this year, I guess there’ll be some questions around their strategy and also questions around the information that they put in the market.»
Lewis said he would be kicking capital spend «into touch» on his 1100 dairy cow operation in order to meet budget if the low payout came through.
He said many agricultural goods and services companies were suffering as other farmers did the same.
«They are all getting a lot of projects put on hold or cancelled.
«It’s going to make the cities and towns very nervous because security of employment isn’t there because the orders aren’t coming in.»
AgrowQuip sales representative Colin Henderson said the farm equipment supplier had already taken a hit from tumbling forecasts.
«It certainly affects us; it stops the phone ringing.»
He said the John Deere dealership brought tractors in six or seven months in advance.
«We’ve got a whole lot of farmers’ tractors sitting in the yard here, we’re stocked up, and now the payout’s down we might have to sit on these for a while,» he said.
NRM feed specialist Jason Ward said sales at the nutrition company would likely start to dive in the next two months.
«What I’m hearing out in the field from my farmers, they’ll be looking at something cheaper or less of it,» he said.
Source: Stuff
