* Next season Fonterra payout seen falling to NZ$7.00/kgms
* Sharp payout drop may slow economic growth, weaken kiwi
* Indebted farmers under pressure to manage finances well
By Naomi Tajitsu
WELLINGTON, May 27 New Zealand's dairy farmers
are bracing for a sharp drop in earnings as milk prices fall
back from record levels this coming dairy season - a headache
for a highly indebted industry that also threatens to slow
economic growth and pressure the New Zealand dollar.
Soaring Chinese demand for milk powder has seen farmers
supplying the Fonterra dairy co-operative, the world's
top dairy exporter, earn more than NZ$8.00 per kilogram of milk
solids for the season winding down this month, the highest since
the co-op was established in 2001.
But increased milk production, both at home, in the United
States and in other countries, now has dairy economists
expecting Fonterra's to make a final payout around NZ$7.00/kgms
this coming season.
Many believe Fonterra's initial forecast, expected on
Wednesday, will start below NZ$7.00 kgms before being revised up
in quarterly updates, but some are more pessimistic, worrying
that the final payout will come in below NZ$7.00.
While a payout of NZ$7.00/kgms would beat prices paid in the
last two years and would sit comfortably above the 10-year
average around NZ$5.90, it could shave NZ$2.3 billion ($2
billion) off the economy in a country where dairy exports
account for a quarter of all exports.
"That would be getting close to a 1 percent impact on
nominal GDP," said ASB rural economist Nathan Penny.
Some economists also expect that lower global dairy prices,
which have already tumbled more than 20 percent this year, could
put downward pressure on the kiwi in the coming months, knocking
it towards $0.80 in the next year or so from current levels
In addition, reduced payouts would come at time when the
Reserve Bank of New Zealand is moving to tighten monetary policy
further, giving added urgency to long-standing warnings by the
central bank and the nation's lenders to farmers to manage their
David Irvine is a typical dairy farmer who has invested
heavily this year to boost production, improve irrigation and
replace staff housing at his two farms outside Christchurch. Now
he is crossing his fingers that those investments will be enough
to preserve profit margins when the payout cut comes.
"It's not going to be nice. It means that our profit will be
lower," he said. "But the theory is that when the season is
good, when all the stars are aligned, you make hay when the sun
Debt for farmers in New Zealand has tripled in the last
decade to total around NZ$30 billion. Borrowing was particularly
heavy between 2005 and 2009 as the "white gold rush', spurred on
by growing demand from China, encouraged dairy farmers to
increase herds and prompted many struggling sheep farmers to
switch to dairy.
After three years of record-low rates of 2.5 percent,
inflation pressures prompted the central bank to hike its
official rates twice this year to 3.0 percent, and it has warned
that rates may rise to around 4.5 percent by 2016.
Debt managers say that many are heeding the call to pay down
debt and switch to fixed-rate debt from floating rates, which
comprise nearly 70 percent of total dairy debt.
"Over the past 12 months when payouts and cash flows have
been strong, more people have been directing surplus cash into
repaying debt," said Ross Verry, ANZ New Zealand's general
manager of agriculture.
"The anticipation of higher interest rates has encouraged
people to pay down debt when they are able to," he said.
But there is still the worry that some of the country's more
indebted farmers could be caught out if the stars that have
recently been so beautifully aligned get skewed.
"If the payout has a NZ$6 in front of it, and we get another
bad drought or a winter storm ... there will be a number of
farmers who have overextended themselves, who will be caught by
a wrong combination of events," said Bruce Wills, president of
Federated Farmers, the country's farming lobby.
($1 = 1.1691 New Zealand Dollars)
(Editing by Edwina Gibbs)