Dairy farmers are being warned to prepare for a $250 million hit to their income, with predictions Fonterra will today announce next year's milk price could be as low as $4.90 a kg of milk solids.
Industry expectation was for the indicative 2009-10 season milk price to be lower than the $5.20 per kg of milksolids (kg/ms) forecast for this season, with commentators picking between $4.90 kg/ms and $5.20 kg/ms.
Such a drop would continue a sharp correction in the industry and could result in the gross income of farmers falling more than $1 billion from the record 2007-08 season when the payout was $7.66 kg/ms.
A $4.90 kg/ms payout would still be well above the 10-year average of $4.21kg/ms.
As a general rule, a 1c change in the milk price equated to $12 million shift in total dairy farm incomes.
The industry has been hit by three blows, with an appreciating New Zealand dollar, which yesterday broke the US62c mark, a tit-for-tat subsidised dairy export war between the European Union and United States, and unsteady market prices.
Last January, just days after the EU announced it would resume subsidising dairy exports, Fonterra cut its forecast milk price for this season from $6 to $5.10 a kg/ms, with the EU's action one reason attributed for the decline.
It looked as if that would happen again this week.
Federated Farmers dairy section chairman Lachlan McKenzie predicted next season's milk price to be between $4.80 and $5 kg/ms, saying the trade war would make Fonterra more conservative.
Westpac senior economist Doug Steel forecast a milk price of $4.90 kg/ms because of those factors.
Even without trade wars and an appreciating exchange rate, he said world milk powder prices had fallen from $US4000 a tonne at the start of the 2008-09 season to a season average of close to $US2800 a tonne.
Add in export subsidies and an exchange rate which had sat around US50c for much of the season before appreciating to US60c in recent weeks, and he warned its impact would be felt in the forecast milk price.
The 92,000 tonnes of US-subsidised exports was slightly more than Westland Milk's total annual dairy production, but its impact could be proportionately much greater.
Massey University agricultural economist Allan Rae said the key for the industry was to watch the impact of subsidised product on world prices.
If prices fell, it could lead to reciprocal action by the EU, further driving down world prices and hurting New Zealand.
Prof Rae said neither country violated World Trade Organisation rules as the volume was below that agreed to as part of the Uruguay trade agreement, but he said it was disappointing it came at a sensitive time for trade negotiations.
Fonterra will also announce its new share value today.
Mr McKenzie said the company had signalled earlier this year that the share value could fall from $5.57 to $4.47.
Since then, international trade conditions have decline even further and he expected the fair value share to be close to the lower value, further eroding farmer equity.
Fonterra has signalled its intention to strengthen its balance sheet and repay debt, which meant that any milk price over $5.20 kg/ms this season could result in the co-op retaining earnings.
It also expected to gain about $400 million in new equity as it stopped contracted milk supply and made all suppliers own shares, but some are questioning why farmers would buy shares when they could contract supply milk to a competitor.
Fonterra's total interest-bearing debt as at January 31 was $7.4 billion, an increase of $1.5 billion from July 31 last year.
