Latest dairy payout ‘solid’ despite ease in prices

This year’s dairy payout is still looking solid, despite an average 3 per cent dip in commodity prices in Fonterra’s latest online auction, economists say.

But a combination of forecast flat world prices and a strong kiwi may cause farmers concern about next year’s earnings, they say.

BNZ economist Doug Steel said the fall in price was the biggest since July, and followed an easing in the previous auction. But there was still the sense that dairy prices had stabilised.

And in the context of the past six months’ global economic volatility, they were ‘‘remarkably’’ stable, not moving outside a 5 per cent band in that time. ‘‘From a dairy farmer’s point of view, the concern will be around a combination of flat world prices and a strong New Zealand dollar that is putting downward pressure on payout for the 2012-2013 season.’’

Steel was expecting further market volatility, but believed this season’s forecast payout by Fonterra of $6.90-$7 was safe. The milk price component of this forecast is $6.50 per kilogram milksolids. Fonterra’s final payout, a cornerstone of New Zealand’s economy, will not be announced for 2011-12 until later this year.

ANZ chief economist Cameron Bagrie said this year’s payout would be down on last year’s, but ‘‘looks reasonably solid’’. However, farmers who were having a bumper production season would have ‘‘the volume kicker’’ to bolster their incomes.

It was too early to forecast the 2012-13 season payout, Bagrie said.

‘‘I have a lot of comfort in saying commodity prices have settled at a higher equilibrium. Payout will remain elevated relevant to history but people need to realise we are in an economic environment that is very fragile.’’

Bagrie said he had confidence that average dairy payout levels for the next three years would stay ‘‘pretty elevated’’. The fragility was caused by ‘‘tremendous tension’’ between the poor fundamentals of many Western countries’ balance sheets, and the huge amount of liquidity being pumped into the global financial system, Bagrie said. The mix resulted in the global economy lurching between ‘‘24-hour to 24-hour riskbouts.’’

‘‘The reality is you don’t get out of a global financial crisis in the space of a couple of years. We are going to have this tension for a while.

‘‘We remain in a period of heightened volatility, so it’s not just absolute dairy payout people need to get their heads around, it’s the volatility that goes with it.’’

Steel was not surprised by the 3 per cent price fall. Dairy commodities were faring better than other global commodities, he said.