Talk Money with Tony Field – August 11, 2015
Farmers are doing it tough. But the country's young sharemilkers are doing it tougher than most.
They miss out on the interest-free loans that Fonterra is offering its farmers.
The co-operative is offering farmers a loan of 50 cents per kilogram of milk solids. It does not have to be repaid until the payout rises above $6 per kilogram of milk solids. The offer was announced on Friday when Fonterra said it was cutting its forecast payout for this season to $3.85 per kilogram of milk solids (from $5.25).
But the offer only applies to shareholding farmers. That is most, but not all, of the farmers who supply Fonterra. It means sharemilkers will miss out because they do not have shares in the co-operative.
Dairy NZ estimates that the break-even point for the average farmer is $5.40. That means that most, if not al,l sharemilkers will be losing money this season, unless they are on a very low-cost farm.
Going to a bank for a loan is not an option for many because they don't own their cows, and they may not have anything else that a bank can loan them money against.
The loans will cost Fonterra as much as $430 million. They will be funded by one-off cost-cutting. This includes the postponement of some spending planned for the coming year. Fonterra is hoping the way the loans are being funded will not impact its debt ratios.
As well as the forecast payout of $3.85, it is forecasting a dividend of 40 - 50 cents per share. So a shareholder farmer is looking at a payout of $4.25 - $4.35, plus a potential loan of 50 cents.
That still does not get them to the $5.40 breakeven point and for young sharemilkers the situation is even more daunting.
The country's smallest dairy co-operative is forecasting a payout that is more than $2 higher than Fonterra's.
Waikato co-operative Tatua expects to pay its farmers $6.00 per kilogram of milk solids, while Fonterra is forecasting $3.85.
Tatua is also expecting to soon finalise a payout for the just-finished 2014/15 season of $6.50 - $7.00. That compares with Fonterra's forecast for the 2014/15 season of $4.40.
The small co-operative makes high margin value-added products. It does not produce whole milk powder, cheese or butter. Instead, it makes spray-dried caseinate (a protein produced from milk) used in products like infant formula. It also produces whey protein concentrate and anhydrous milk fat (AMF).
These products are often high margin, and in some cases the margins grow as the milk prices fall.
But is it fair to compare Tatua to Fonterra?
Fonterra has to collect milk from all over New Zealand and it has over 10,000 farmers. Under the Dairy Industry Restructuring Act it also has to buy milk from any farmer that wants to sell and it has to sell up to 50 million litres of milk to competitors. So Fonterra and Tatua are different.
But there is no reason why Fonterra could not be competing more with Tatua in the value-add market.
This is likely to increase the questions about splitting Fonterra into two companies - a milk producer and a value-add business.
Here is my chat with Paul Henry about Tatua
Oil prices have rallied by 2.4percent on global markets, after some analysts predicted that prices might be bottoming out.
West Texas Crude is trading at US$44.96 a barrel, while European Brent crude jumped by more than a dollar to US$50.41.
Oil prices have fallen hard since the start of last month, from about US$60 a barrel to the mid-US$40s. That was due to increased production and a patchy outlook for demand.
The New Zealand dollar is holding just above 66 US cents this morning, trading at 66.12.
The Kiwi is 89.25 Australian cents, 42.42 British pence, 82.38 Yen and 60.02 Euro.