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Cashflow smoothing

Key highlights

Fonterra cut its 2015/16 farmgate milk price forecast by $1.40 to $3.85/kg, largely in line with expectations.
In addition, a $0.50/kg support payment to farmers will boost cashflows and farm confidence.
However, the extra support may delay or slow the dairy price recovery.
 

Report prepared by:

Nathan Penny, ASB Rural Economist
Phone: +64 9 448 8778
Email: nathan.penny@asb.co.nz


Summary:

With the milk price forecast close to expectations, the big news is the support payment to farmers.  We expect a temporary boost to dairy sector confidence and to wider business confidence. 

At the margin, we see this announcement as reducing some of the downside risk to our growth and interest rate forecasts.  We continue to expect a further 50bps of OCR cuts this year.

For farmers, this announcement has the impact of smoothing cashflows.  Short-term cashflows are better due to the support payment.  But in the medium term, the dairy price recovery may be delayed as better cashflows provide some incentive to maintain production at a higher level than in their absence.  As a result, we place our relatively optimistic 2015/16 milk price forecast of $4.50/kg under review.

Read the full PDF Report



Important Disclaimer - The views expressed herein are those of the authors and are based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are not necessarily the views of ASB Bank Limited and are given with an express disclaimer of responsibility and no right of action shall arise against any of the authors, ASB Bank Limited or its employees either directly or indirectly out of any views, advice or information.
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