Fonterra cuts NZ farmer advance payments

13 Dec, 2018 04:00 PM
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Agriculture debt in New Zealand is $NZ62 billion, with dairy at $NZ41.5 billion.
We're not taking money back off farmers, we're just not giving them as much as we would have ...
Agriculture debt in New Zealand is $NZ62 billion, with dairy at $NZ41.5 billion.

Fonterra's New Zealand suppliers are crying foul after the co-op cut the level of payments they were expecting to receive.

It has lowered its advance rates in December from $NZ4.15 to $NZ4 per kilogram of milksolids.

NZ Federated Farmers dairy deputy chairman Wayne Langford said the flow-on effect would be felt throughout the provincial economy.

"It's not the best news before Christmas," he said.

"A drop in the milk price isn't too unexpected because of the indications given by GDT [global dairy auction] results, but this cut in advance payments is more of a concern.

"The advance payment isn't necessarily locked in but farmers are wondering why it's happened, and why they didn't take it off later in the season.

"When big business decisions like that are being made, you wonder what's going on."

A Fonterra spokesman said the payment cut had to be made because, following the recent milk price forecast to $NZ6-$NZ6.30, the dairy giant had paid a bigger percentage to farmers than was allowed in its guidelines.

"We're not taking money back off farmers, we're just not giving them as much as we would have under the old milk price," the spokesman said.

Already Fonterra farmers are smarting over three falls in the milk payout forecast since the beginning of the season, which started at a high of $NZ7 per kgMS.

However, it now looks likely it will fall to $NZ6 by the end of the season - a drop of $NZ140,000 for average farmers compared with what they had been budgeting for.

Fonterra said the cut in advance payments from $NZ4.15 per kgMS to $NZ4 was not a cashflow issue and was unrelated to its financial performance.

"When the co-op updated the milk price for the current season, we also re-set the advanced rate schedule, based on a forecast milk price of $NZ6.15. Whenever the milk price forecast changes, the co-op reviews the advance rate schedule as standard practice and provides this information to farmers as the announcement is made," the Fonterra spokesman said.

Debt

The latest NZ Federated Farmers banking survey released on Tuesday showed dairy farmers have been starting to chip away at their debt, but Mr Langford said this would slow.

In May, following Fonterra's $NZ7 forecast, DairyNZ predicted farmers would be able to reduce debt or invest back into their farms It said break-even costs for dairy farmers nationwide for 2018-19 was between $NZ5.40-$NZ5.50 per kgMS.

Mr Langford said farmers were now moving "that much closer" to the break-even price.

"This takes that extra spending out of the market, farmers will be thinking twice about their capital expenditure and will be prudent in their budgets," he said.

"I don't think there's a lot of spare cash in the industry at the moment. A lot has been going into debt repayment."

The average dairy farm mortgage is now $NZ4.6 million, down from $NZ5.06m in May this year. Dairy farms continue to be more likely than other farms to have a mortgage over $NZ2m.

The expansion of the dairy industry in the past decade means dairy farms have borrowed significantly to invest in infrastructure and additional land.

As a group, more farmers in the banking survey (11.6 per cent) reported feeling "undue pressure" from their banks than at any time since August 2015, a 2 percentage point rise between May and November.

Recently the Reserve Bank expressed concern a small number of farmers was struggling to pay down debt, although fewer were feeling stressed.

Agriculture debt is $NZ62 billion, with dairy at $NZ41.5b, sheep and beef $NZ14.1b and "other" including horticulture $NZ6.3b. Three years ago dairy farmer debt stood at $NZ34b.

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