Payout ‘adjustment’ needed

 Co-op chairman John Wilson says “adjustments” will be made to balance out the advance rate over the coming months and there is no need to claw back extra money already paid.

The co-op is slashing advance rate and capacity adjustment payments to suppliers from February to match its $4.70/kgMS revised forecast payout; from February farmers will get $4.37/kgMS – made up of $3.85 in advance plus a capacity adjustment payment of 25c. 

Between July and August this year farmers received $5/kgMS for milk supplied the previous month to Fonterra; this included $4.48 advance rate and a 52c capacity adjustment payment and was based on the previous $5.30 forecast payout.

Capacity adjustments reflect the extra demand placed on processing capacity by farms that produce more than the company-wide average milk volumes during the peak months September to January.

Last week the co-op was forced to slash the forecast payout by 60c due to volatility in the global markets.

Wilson says the advance payment is fixed at about 90% of the forecast payout, to protect the co-op’s balance sheet and provide strong cashflow onfarm.

“From the co-op’s perspective we are doing everything to return cash to farmers while ensuring the co-op has a strong balance sheet and cash growth,” he told Rural News. “Like any business there are ups and downs and adjustments are made along the way.”

Federated Farmers dairy chairman Andrew Hoggard notes that farmers were paid above the forecast payout for milk during months when little milk is produced. “This should make adjusting payments easy.”

Hoggard says a lower advance rate will make life harder for farmers. “The drop in payout was expected and many farmers have already tightened their belts to ensure their cost of production falls below the revised forecast payout.”

Farmers are taking the reduced payout on the chin and moving on, he says. After the latest payout dip, farmers are saying “pretty much – ‘bugger’!”

“We see overseas farmers taking to the streets and throwing shit at Parliament; in New Zealand we know the Government is not responsible for this, it’s all about demand and supply in the global markets,” says Hoggard. “We get good times, we get bad times; we just have to roll with the punches.”

Hoggard says farmers are aware the payout could dip further if global dairy markets don’t improve.

Agribusiness expert, Keith Woodford, Lincoln University agrees farmers are not surprised by the $4.70 milk payout.

He raises the idea of using the dividend payout to unit holders to subsidise the milk payout. 

“There’s an argument that given that last year Fonterra took money from the milk payment to pay the dividend, that this year the dividend should subsidise the milk payment.

“This is an important issue for sharemilkers who do not get a dividend; sharemilkers, particularly those in their first season, are the ones who will be doing it tough.  Also, some contractors who rely on farmers will also be doing it tough.”

Rebound mid 2015?

Fonterra chairman John Wilson expects dairy prices to rebound towards the middle of next year.

The co-op had earlier talked about whole milk powder prices rebounding to US$3500 by March to sustain a $5.30/kgMS milk payout. 

However Wilson says the fall in global milk has been slower than expected. “The drop in global supply in the US and the EU is starting to happen but there will be a six-month lag before prices start coming up,” he told Rural News.