Landcorp rejects suggestion low dairy prices will prompt Wairakei review

Landcorp Farming has rejected a suggestion by Finance Minister Bill English that low dairy prices could prompt the state-owned farmer to scale back its dairy conversion on the 26,000 hectare Wairakei Estate north of Taupo, which is forecast to become the biggest milk producer in the southern hemisphere.

Mr English told TV3's 'The Nation' programme that Landcorp is having a "good hard look" at its massive dairy conversion in the wake of a plunge in dairy prices and it was "a bit uncomfortable with it." However Landcorp chief executive Steven Carden said the project was unlikely to be halted by short-term price fluctuations.

"We constantly review how we can make best use of the land across all our 140 farms around the country in terms of economic and environmental factors," Mr Carden told BusinessDesk. "That’s not impacted by a low or high payout. These are long-term developments and we look at the long-term payout expectations."

Landcorp, New Zealand's largest corporate farmer, is 12 years into a 40-year lease to develop and farm former forestry land in the Wairakei Estate. Mr Carden said the conversion is going well so far, with 13 dairy farms now operating. Once the conversion process is complete, the estate's dairy farming operations are expected to be the largest in the southern hemisphere, producing about 16 million kilograms of milk solids a year, according to an economic assessment by Insight Economics.

Mr Carden said Landcorp farms in every region in the country and aims to make the best use of land in an environmental and economic sense.

"Dairying has proven to be a very productive and efficient use of the land around the country, including the Central Plateau," he said. Landcorp is launching its first sheep milk farm on the Wairakei Estate this week, which it says holds enormous potential as a high-value export to European and Asian markets as well as positive environmental gains and Mr Carden said the company is keeping an "open mind" on what is the best approach for the land.

The economic assessment for the Wairakei Estate forecast revenue increasing to $168 million by 2021, at the end of the conversion process, from $41 million in 2014, with dairy revenues accounting for the lion's share of future revenue. At the time, the milk price assumption was $7 a kilogram of milk solids.

Fonterra Cooperative Group, New Zealand's largest milk processor, this month cut its forecast payout to farmers in the current 2015/16 season to $3.85/kgMS in response to a slump in global milk prices, from $4.40/kgMS in the 2014/15 season and a record $8.40/kgMS in 2013/14. Dairy NZ estimates $5.70/kgMS is the industry average breakeven point for most farmers.

Fonterra chief executive Theo Spierings has said the farmgate milk price or advance rate could rise above $6/kgMS within six months to a year.

Fonterra will reduce the volume of milk powder it offers for sale on the GlobalDairyTrade auction this week, an announcement that helped spur a gain last week in NZX whole milk powder futures contracts.

OMF financial markets director Nigel Brunel said as a result, he expects the price for whole milk powder at Tuesday night's GlobalDairyTrade auction to rise more than 15%.