Fonterra yesterday slashed its forecast for this season’s farmgate milk price from $5.30/kg milksolids to $4.70/kg, 44 per cent down from last year’s record of $8.40/kg.
This would mean a $6.8 billion reduction in payout to the nation’s dairy farmers, according to Infometrics senior economist Benje Patterson.
But the economic pain would not be shared equally across the country.
Although dairy farming accounts for only 2 per cent of gross domestic product nationwide, it accounts for more than 20 per cent of GDP in some areas such as Otorohanga, south Taranaki and Westland which stand to lose hundreds of millions of dollars from the payout cut.
Patterson said these areas would be hit hard, even though there were some offsetting factors such as rising sheep and beef prices.
«It could push some very exposed areas into recession,» he said.
For the major centres it’s a different story, especially in Auckland, where dairy farming is not even a factor in GDP.
Patterson said these main cities should continue to grow, with Auckland the main beneficiary of a boom in migration.
But the cities could feel some «second-order impacts» from the dairy industry’s woes.
This would get much worse if the payout was low again next season.
«In Hamilton they do feel it when the dairy industry is down, but the big test will be what happens next year.»
Earlier this year Federated Farmers dairy chairman Andrew Hoggard said 25 per cent of farmers had costs of production of over $5kg/milksolids.
Farm services, fertiliser companies and contractors have all painted a gloomy picture following Fonterra’s latest announcement.
Rural contractors president Steve Levet said «there’ll be crying before bedtime, that’s for sure».
South Island contractors were especially under pressure because they had been hit by a «double whammy» of poor climate conditions and the low payout forecast.
Levet said it had been extremely wet in Southland and unseasonably dry in Canterbury.
South Island contractors were exposed because they were heavily geared up for the dairy business, following the recent rapid expansion there.
«But all contractors will be feeling the pinch,» he said.
«This time last year people were feeling so buoyant that they would have said: ‘Yes I’ll buy that extra tractor’ and now they’re thinking: ‘Oh my God, I’ve done the wrong thing’.»
Fertiliser firm Ballance chief executive Mark Wynn said it had been a good spring to date in terms of fertiliser ordering, but many farmers had also been non-committal until yesterday’s decision.
John Kuyf, managing director of South Island rural service business REL Group, said the financial and emotional impact of Fonterra’s latest forecast will be «quite severe».
«Most of my friends needed $5.30 just to keep above water,» he said. «It’s not a nice feeling waking up and knowing you’re losing money every day.»
Kuyf employs 60 staff at his engineering business in Rakaia, one of the most dairy-oriented parts of the South Island.
His Rakaia Engineering (REL) supplies agricultural buildings and equipment, grain storage and handling equipment, and feeding and stock-handling systems.
REL would be able to offset some lost business by exporting more technology and it was also likely to do more machinery maintenance, he said.
A sub-$5kg payout would have a more lasting impact on people’s mental outlook, he said.
Kuyf said people were feeling «a bit beaten up» by the thought of making no profit from each day’s milking.
Not long ago he pondered initial predictions of a $6kg payout and thought «gosh, that’s not good – $4.70kg I thought flippin’ heck.»
«People who get up this morning will wonder if they’ve got a job in six months’ time.»
The predicted payout could affect the national economy for a couple of years, including tax revenue.
«We won’t come out of this overnight.»
Source: Stuff
