Fonterra revised payout, 'tough but manageable'

28 January 2009

Fonterra revised payout, 'tough but manageable for farm businesses'

"The detail behind the latest revised forecast payout figure of $5.10 per kilogram of milksolids (kgMS), for the 2008/09 season, means it will be tough but manageable for well run farm businesses," says Lachlan McKenzie, Federated Farmers Dairy chairman.

"This comes at a time when there is a glimmer of light appearing at the end of the tunnel for other commodities and the revised payout is still the third best payout this decade. While the revised payout will be tough on some farm businesses, the majority are well managed and moderately geared. The fundamentals for dairy remain extremely good so while this revision is disappointing, it is not a calamity.

"While Fonterra's revision to its forecast payout since last September has slashed export receipts and the income of New Zealand's dairy farmers by around $1.8 billion, this has coincided with an implosion in commodities generally.

"The devil for supplier shareholders comes with them effectively bankrolling Fonterra for some five months, in the case of the advance payout and six months, for the value return component.

"The first part of the value return component, due in April, has been folded into one payout, which now comes in October. Given the current forecast for this component, a large chunk of the half billion dollars farmers would have budgeted for in April has now gone.

"The second unpleasant surprise comes with incremental payouts being delayed until the end of the season in June. Each month, dairy farmers receive a baseline payout of $4.05 with an increment on top of moving towards the final payout. This increment would have formed part of farmer budgets but this has been pushed back into June onwards

"The interest costs for farmers bankrolling Fonterra will mean the effective payout in the hand for farmers will be less than the $5.10 figure estimated.

"This is not just unprecedented, it will require some farmers to immediately call their banks to arrange or extend overdraft facilities. This will impact the economy at many levels.

"In light of our concerns over banks farming farmers with business overdraft rates, the Federation will be writing to the regulators. Clearly, liquidity will be essential for farmers who will now have to undertake major revisions of farm budgets.

"It is also to the Board's credit that Fonterra seems to have listened to Federated Farmers call for them to under promise and over deliver on the revised payout, if current market conditions do not deteriorate. If being a small word, however, with a very large meaning," Mr McKenzie concluded.

ENDS

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