Further Decline in Dairy Payout Forecast.Wednesday, Feb 12, 2003
It is a painful coincidence that annual dairy payout prices seem to always decline in a year when a period of drought arrives. The high productions and higher payouts of the past couple of years will be but slightly comfortable memories against the harsher realities of today.
The unease that farmer shareholders of Fonterra may be feeling after today’s announcement must be one of confusion about the actual performance of the cooperative.
On one hand it is reported that the post merger benefits are being realised but on the other there is unsettling ambiguity in the reported sales and hedging activities of the coop.
Much has been made of the need for exchange rate hedging and the success of its primary purpose in stabilising the predicted payouts each season.
The price for these accurate predictions in periods of exchange rate decline has never been quantified. But to see that insufficient cover has been bought in times of appreciation is doubly expensive to the producer and it is the significance of this gap that should be questioned.
In times past the old Dairy Board had taken a view that it was in the business of selling product for what it was worth on the day and accepting the result in $NZ as soon as possible. The risk of a board trading in financial paper on behalf of its members was not seen as a function that would benefit payout in the long term.
Although the forward exchange cover policies changed as the Boards funding shifted from state to commercial the principle espoused in the words “not trading in paper” should be revisited.
Perhaps the Directors and Executives of Fonterra need to realise that all the financial trickery and slight of hand being reported is disguising the realities of the market in terms of farm gate prices.
Fonterra seems to be drifting into a risky mix of exchange manipulation on sales with its policies for forward cover management that may not be in the interests of producers.