Fonterra forecast the day the recession hit home

Fonterra’s 2009/2010 season forecast of $4.55 per kilogram of milksolids (kg/MS) is a serious wake-up call for the Minister of Finance ahead of Budget 2009. It represents some $3.7 billion less in farm income than the 2007/08 season and $780 million less in farm incomes forecast for the current season.

“These numbers are bleak,” says Lachlan McKenzie, Federated Farmers dairy chairman.

“This $4.55 kg/MS forecast is made up by milk, which is down by $0.65 to $4.10 from the current season forecast. The dividend like value add component remains the same at $0.45.

“So if you live in the city and think you’re immune from this, think again. It’s a hell of a lot of money that isn’t coming through the front door of the economy.

“Federated Farmers has a stark message to both councils and Government ahead of the Budget. That’s to pull in your horns about spending and the costs that have been forced onto farmers.

“In the 2006/07 season, it was estimated it took $4.54 to produce one kilogram of milksolids before a farmer turned a single cent in profit. There’s very little margin.

“Regional councils, like Southland and Bay of Plenty, are looking to charge punitive rates on dairy farmers and extra charges for water. This attitude, that farmers are a bottomless pit of money, stinks. Councils are killing the economy’s golden goose and the Government has to step in and control council rating powers.

“For farmers, cashflow and a reduction in off farm costs is vital. A practical area where councils can help us out is by reining in the rates they are currently formulating.

“The only good news is $0.20 kg/MS for this current season’s value add component being paid out in August, rather than in October.

“Federated Farmers is concerned about Fonterra’s ongoing fixation with its capital structure. Senior management and the board have to focus on servicing customers and shareholders to maximise revenue.

“Farmers cannot afford to have the eye of management and the board off the ball and on a shiny new capital structure that is a low priority for most shareholders.

“Then we come to the online trading platform GlobalDairyTrade. That seems to be more a tactical political response to capital structure rather than a strategic market led response. It introduces a spot market when previously long term paddock to plate relationships existed.

“That’s why Federated Farmers stands by its call for an independent review of GlobalDairyTrade.

“Aside from a small study from NZX subsidiary Agrifax, there are questions around GlobalDairyTrade that need answers. The most obvious being, does it help farmer incomes?

“Then we turn to the global picture where subsidies and protectionism is back. While Federated Farmers saw light at the tunnel, that was snuffed out thanks to the United States over the weekend.

“It took New Zealand several seasons after the last lot of subsidies were lifted, before we started to flower. The 2007/08 season shows what potential an end to subsidies could bring the economy.

“Federated Farmers most important priority is to help farmers. We are contacting the banks to see if a series of seminars can be set up to provide practical assistance to them. The first thing the banks could do is to pass on cuts to the Official Cash Rate,” Mr McKenzie concluded.