Crashing international dairy prices have wiped $2 billion off the New Zealand economy in the last year, with Fonterra yesterday reducing its forecast payout to farmers this season from $6.60 a kg of milk solids (m/s) to $6.
But consumers should not to expect the lower payout to immediately flow through to reduced domestic retail prices for dairy products, a Fonterra spokesman said.
The exchange rate was volatile and still determined the price of raw milk. It would take time for inventory bought at higher raw material prices to reach the market and Fonterra never passed on the full amount of record commodity price on to its customers, he said.
"We do not set retail prices. It is up to retailers if, and how much, of any wholesale food price reductions are passed on to consumers."
Last season, Fonterra paid its suppliers a record $7.90 a kg m/s and prospects for this season looked slightly weaker, but still promising, until international dairy prices fell 24% in the last eight weeks.
Chairman Henry van der Heyden said yesterday the speed of that fall caught everyone by surprise and was a sign the world economic crisis was starting to bite.
Milk powder prices were especially hard hit.
He urged farmers to "hunker down" to make cautious and conservative decisions and said the scale and impact of the economic crisis should not be underestimated.
Fonterra was easily New Zealand's largest exporter, earning nearly $20 billion in revenue last year, but the financial crisis would reduce its earnings this season, potentially accentuating the country's recession.
The co-operative's chief executive, Andrew Ferrier, said earlier predictions prices would recover in mid-2009 appeared overly optimistic.
"While the medium to long-term outlook for dairy remains positive, the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year."
Dairy production was also increasing in the United States and Europe which would hang over the industry.
South Otago dairy farmer Stephen Korteweg said the 60c a kg m/s drop was larger than he was expecting, and he doubted it would improve when Fonterra struck its final payout at season's end.
At $6 a kg m/s, the payout was still about $1 a kg m/s ahead of the median price Fonterra has paid farmers for the last seven years, but Mr Korteweg said it would still prompt farmers to look closely at their spending.
"They will be a bit more prudent and budgets will be a bit more realistic than what they were."
Banks have previously told the Otago Daily Times that most dairy farmers budgeted on a payout of about $4 a kg m/s, but Mr Korteweg said the revised payout could result in the delay or abandonment of conversions of land from sheep and beef to dairy.
He agreed with Mr Ferrier that long-term prospects remained bright.
"I think dairy is as good as, if not better than, anything else. Dairy is the basis for most food," he said.
Mr Ferrier said the next few months would be difficult.
"I am still very positive about dairy prices in the medium to long term. I still believe in the long term we have a good environment, but we have a tough trough to go through which has been made worse by the economic crisis."
Federated Farmers dairy section vice-chairman Willy Leferink said dairy prices had not declined as much as other commodities, with oil falling 60% since July and wheat 56% since March.
Farmers should tighten their belts and not expect any quick rebound, he said.
Fonterra payout
What Fonterra has paid its suppliers:
2001-02 $5.33 kg m/s
2002-03 $3.63 kg m/s
2003-04 $4.25 kg m/s
2004-05 $4.59 kg m/s
2005-06 $4.10 kg m/s
2006-07 $4.46 kg m/s
2007-08 $7.90 kg m/s
2008-09 $6 kg m/s (forecast)
• In 2008-09 Fonterra collected 1.2 billion kg m/s from its 11,000 shareholders for which it paid them $9.3 billion, or $7.90 a kg m/s.
• For that same volume of production this year, farmers would receive $7.2 billion at $6 a kg m/s.