Farmers hit hard

By Hugh Stringleman

Friday 14th February 2003

An unprecedented swing in world dairy prices has put Fonterra Co-operative Group on the ropes, forcing it to make a late announcement of a 10c/kg cut in milksolids payments to 13,000 suppliers in the current season.

With only a few weeks of milking left, farmers and sharemilkers know that their best efforts will earn only $3.60/kg, a far cry from last season's $5.30.

This is despite Fonterra being almost fully hedged at 47USc, anticipating a $500 million gain on foreign exchange dealing this year, and the impact of the Australian drought, which has led to a recent substantial firming of world dairy prices.

The half-year result announced this week could not hide new chairman Henry van der Heyden's chagrin at having to make his first payout announcement a late and negative one.

Fonterra has always said that its payout estimates are its "best estimate, with equal chance of upside and downside."

This differs from the former Dairy Board, which started with low and achievable predictions and edged upward as the season progressed.

Fonterra chief executive Craig Norgate said farmers deserved the truth, however much it hurt. They would have to absorb more pain from a rampant Kiwi dollar, now 37% higher, at 55USc, than its lowest point in late 2001, coincidentally at the time Fonterra was formed.

Fonterra is only cautiously predicting a 2003/04 season milksolids price of $3.70-3.90/kg.

Two graphs Mr Norgate displayed showed world prices falling last season from $6/kg equivalent down to less than $3, while farmers' payments went the other way. This season world prices began around $2.65, as have farmers' advance payments, and will edge up to $3.10 in May. Fonterra will make the payout up to $3.60 with hedging gains, value-added activities and processing efficiencies.

Mr van der Heyden said Fonterra had knocked 8% out of costs in the half-year to November 30, compared with 2001.

Turnover in the first half was just under $6 billion, down from $7 billion. Yet sales volumes were at record levels and Fonterra has made inroads into its inventory, which historically is a third of production.

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