The ODT see more pluses than minuses in the increased Fonterra payout:
Fonterra announces record payout to farmers of $7.90 kg of milk solids for this season; up from $4.46 last season.
The higher payout increases by $4 billion the cash injection into the economy.
It will be worth an extra $30 million to the Otago economy and an extra $70,000 in gross income to an average Otago farmer.
2008-09 opening forecast payout $7 kg of milk solids.
The bad news: Consumer dairy-product costs will rise, putting pressure on already stretched grocery budgets.
Another plus for the country, which might not be appreciated by farmers, is the increased tax that will be paid. Last season’s payout meant that most farmers made small, if any, profits. Even with the increased costs of fertiliser, feed, fuel, power and wages most farmers will have very healthy taxable profits this season.
The opening forecast of $7 for next season is also very good news – even with the cautionary advice that actual payouts can be higher or lower than initial forecasts and the uncertain international finanancail situation might mean the final payout could drop. Of course it could, but the growing demand for protein makes that unlikely.
Largely overlooked in the excitement over the increased payout was the news that Fonterra’s fair value share price has dropped from $6.79 to $5.22.
That’s disappointing for those wanting to get out of the industry or change suppliers – friends who are selling found themselves around $500,000 poorer after the announcement. But it will make it a little easier for people planning to sign up to Fonterra because it reduces the cost of entry. And one reason for the drop in the share price could be competition from other companies which don’t require new suppliers to buy shares, making it much cheaper for them to get in to the industry.
The increased payout and good forecast will make dairying more attractive, but excitement will be tempered by the knowledge that costs will also rise, and most won’t go down if/when the payout does. Fertiliser prices have already risen: superphosphate was $270 a tonne and is now $511; urea has gone from $690 to $948 and the price of DAP has more than doubled from $706 to $1526.
The price rise is being driven by increased international demand. It won’t be welcomed by those in dairying and will be even less welcome for sheep farmers.