NZ dairy farmers facing big earnings cut

WELLINGTON — New Zealand's dairy farmers, a mainstay of the isolated South Pacific nation's exports, face a 24 percent fall in payments for milk this year because of slumping world prices, a new blow for an economy already in recession.

The lower payment from New Zealand dairy-farmer owned Fonterra Cooperative Group, the world's largest dairy exporter, will shave at least $521 million from dairy incomes nationwide.

Henry van der Heyden, the company's chairman, said Friday that milk suppliers will be paid 6 New Zealand dollars ($3.14) for each 2.2 pounds (1 kilogram) of milk solids for the production year ending May, 2009, down from a record $4.13 the previous year.

New Zealand's dairy farmers enjoyed boom times in the last milking season with the industry's 10,724 farmers receiving their highest payout since the industry was established in its current form 43 years ago.

Dairy producers, who on average each received more than $438,000, must pay production, labor, rental and all other costs from their Fonterra payout. They don't receive any government subsidies.

But a decline in global commodity prices from record highs has been exacerbated by the global financial crisis, and contributed to dragging New Zealand's economy into recession.

"No one should underestimate what is actually happening in the global markets," Van der Heyden said in broadcast to farmers.

"This is probably the worst that it has been for two generations," he said. "The message is for farmers to be cautious in their planning. On my farms, I'm just telling everybody to just hunker down."

Fonterra, which controls more than 95 percent of New Zealand's milk supply, is the country's largest multinational business, its second-biggest foreign currency earner and accounts for more than 24 percent of the nation's exports.

The company's global standing took a blow earlier this year when Chinese milk producer Sanlu Group Co., Fonterra's partner in China, was identified at the center of a tainted milk scandal.

Fonterra Chief Executive Andrew Ferrier said world prices for butter, milk and cheese were down about 42 percent from record levels a year ago, with dairy commodity prices down 21 percent in October alone on a Dow Jones index of commodities.

Prices were likely to keep on falling, and further than had been expected, he warned.

"With consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover" by mid-2009 as initially expected, Ferrier said.

Turning to China, Ferrier said it was increasingly likely that Fonterra would have to write off the estimated $38 million balance of its investment in the joint venture with Sanlu.

No agreement has been finalized to sell Sanlu's assets, but it seemed likely any proceeds would go to meeting the Chinese milk producer's liabilities, he said.

Fonterra wrote down $85 million of its investment in its 43 percent share of the joint venture with Sanlu in September after the Chinese company's role in the tainted milk scandal was exposed.

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