Estimates for Fonterra's farmer payout tumble amid weak dairy prices

Forecasts for Fonterra Cooperative Group's [NZX: FCG] payout to New Zealand farmers this season have tumbled below the company's estimate following the third consecutive decline in prices on the GlobalDairyTrade platform.

Four of six analysts surveyed by BusinessDesk pulled back their estimates for the payout today, after whole milk powder prices declined 11% at last night's GDT auction, taking the total decline over the past three sessions to 22%. Estimates for the payout now range between $4.25-4.60 per kilogram of milk solids, pulling the top end of the range down from $5.30/kgMS. Fonterra is set to review its current forecast of $4.60/kgMS in early December.

Although dairy prices are expected to recover, that hasn't happened yet as global milk supply continues to outpace demand. That's weighing on the outlook for New Zealand's largest export commodity and is putting increased pressure on the nation's dairy farmers, following a weak $4.40/kgMS payout last season. DairyNZ, the industry body that collects data from farmers, estimates the average farmer needs $5.30/kgMS to break even, and the Reserve Bank has flagged dairy sector debt as a growing risk to financial stability.

"Many farmers will be facing a second consecutive year where cashflows are below breakeven levels," Westpac Banking Corp senior economist Anne Boniface said in a note today, where she reduced her Fonterra payout forecast to $4.50/kgMS from $5.30/kgMS.

"That's something the Reserve Bank is keeping a close eye on," she said, citing the central bank's latest Financial Stability Report, published last week. "Right now, one of those risks is clearly dairy sector debt in the current low dairy price environment."

To help tide over cash-strapped farmers through the period of weaker prices, Fonterra has offered 50c/kgMS as an interest-free loan.

Although this will help reduce the amount borrowed from retail banks, increasing debt is a strategy that can last only so long, Ms Boniface said.

Continued weak dairy prices reinforce expectations that the Reserve Bank will cut interest rates a quarter point to 2.5% next month, ASB Bank rural economist Nathan Penny said in a note today, where he reduced his forecast to $4.60/kgMS from $5/kgMS. The Reserve Bank has cut the official cash rate three times already this year and may continue cutting over 2016, ASB said.

(BusinessDesk)