Fonterra have announced they’re making a payout announcement at noon on Friday. It’s outside the usual cycle of board meanings so farmers are braced for bad news.
Fonterra had already carved nearly 6 percent off its initial forecast for this season’s payout to farmers, trimming it on September 24 from $7/kg of milksolids to $6.60/kg.
It blamed a downturn in international prices and demand.
Since then, milkpowder prices on Fonterra’s regular internet auctions have slumped a further 24 percent.
In September, Fonterra chairman Henry van der Heyden said high prices had dampened global consumer demand and encouraged production increases in rival exporting nations.
Today, he warned volatility in global dairy prices was likely to be the norm, rather than the exception, in the medium-term.
“With global financial confidence tenuous at best and the inevitable lag between price signals guiding farmer decisions around production, there is every possibility of an imbalance between demand and supply influencing prices,” he said.
Established farmers with reasonable equity in their farms won’t like a lower payout but won’t be too worried by it. But those who bought established farms or undertook conversions at the top of the market and are fully geared will have more cause for concern.
Bankers have said that as long as people can service their mortgages they won’t be worried, but anyone fully stretched at the current payout of $6.60 will be very concerned at a drop, especially if as rumours suggest, it goes below $6.
Budgets can be reassessed and some costs will be reduced to take account of a lower income but costs seldom if ever go down as far or as fast as returns and the impact of a lower payout won’t be confined to farms.
The dairy boom has kept rural communities bouyant with good returns flowing through to provincial towns and cities and into the national accounts. But farmers concerned by gloomy economic forecasts have already been keeping a tighter rein on expenditure and a lower payout will make them pull back further. That will affect the people and businesses that contract to and supply them and the impact of that will filter through to the rest of the economy.