What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
The average farmer lost about $100,000 in farm income from the drought, DairyNZ says.
Fonterra has announced an opening forecast farmgate milk price of $7kg/MS for the 2013/14 season - up $1.20 on the current season. In addition, the cooperative confirmed a higher advance rate schedule, with an opening rate of $5kg/MS.
DairyNZ chief executive Tim Mackle says many North Island farmers have had to increase their overdrafts because of the double whammy of extra feed costs and a drop in their income because of less milk production due to the drought.
"This forecast increase in payout will help them cope with that increased debt. The higher advance rate will also give farmers some extra cash early in the season when they will need it most to spend on feed and spring fertiliser. This is good news for rural communities too – as many services and other businesses depend on the farming community's spending to keep their economies thriving.
"Nearly half of a dairy farmer's business income is spent on farm working expenses and that money circulates through the local economy. Farmers should now be able to make spending decisions with some confidence," he says. "Farmers will be looking at how they can invest this extra income to make the most of the next season and to strengthen the resilience of their businesses.
"We've calculated that the average North Island farmer has had to spend an extra $57,000 on feed this season because of the drought," he says. "Combined with less milk production, the average farmer lost about $100,000 in farm income, and some much more than that.
"Farmers have to manage their cashflows closely to match their peaks and troughs of income and expenses so they are keenly focused on these forecast payouts. Many will be budgeting tightly and this $7 forecast should help keep those winter blues from getting them down. Some will also be keen to use the extra income to reduce their debt," he says.
"Going into winter, farmers will still be worried about whether they will have enough feed come springtime when their cows have calved, and their animals need good nutrition to produce milk. A lot of farmers used winter feed stocks during the drought. Luckily we've had some good warm wet weather over recent weeks and pastures have recovered well. But the colder weather is here now and that's when grass growth slows down."
Mackle says the payout forecast will also help with the economic stability of dairy farmers and the industry. "We estimate more than 40% of North Island farmers could be struggling to meet both their cash expenses and interest costs for this 2012/13 season, given the impact of the drought. However, for the 2013/14 season, with this forecast $7 payout, we think that only about 5% may now have difficulty. That bodes well for the future of our farmers and the country's export earnings."
Overall, NZ milk production for the 2012-13 season is down 2% compared to last year's record, he says. "Luckily parts of the South Island have not been affected by the drought and milk production is up around 8% in some regions like Canterbury. That has helped keep the country's production close to last year's record despite some North Island regions being down around 9%."
