Weak dairy prices prompt pull back in payout expectations

Weak dairy prices prompt pull back in expectations for payout to NZ dairy farmers this season

By Tina Morrison

July 2 (BusinessDesk) - Weak dairy prices have prompted analysts to pull back their expectations for Fonterra Cooperative Group's payout to farmers this season, with most forecasts now sitting below the dairy exporter's.

Average prices dropped 5.9 percent to a six-year low in the GlobalDairyTrade auction overnight, paced by a 10.8 percent decline in whole milk powder, the nation’s key export commodity. Continued weakness in dairy prices is being driven by increased supply from New Zealand, Europe and the US amid lacklustre demand in China and an import ban in Russia.

Fonterra, which accounts for the bulk of whole milk powder sold on the GDT, lifted its volume on the platform in the latest auction as New Zealand production increases in the lead-up to peak supply in October.

"Last night's GDT auction suggests the market is going to struggle to digest higher seasonal powder volumes from New Zealand over coming months," ANZ Bank New Zealand chief economist Cameron Bagrie and rural economist Con Williams said in a note. "There is little on the horizon to suggest there will be a meaningful turnaround in international powder prices anytime soon."

ANZ reduced its forecast payout to dairy farmers for the 2015/16 season to $4.50 per kilogram of milk solids, from a previous estimate of $5-$5.25/kgMS. That's below Fonterra's forecast of $5.25/kgMS.

ASB Bank cut its forecast for the season by 70 cents to $5/kgMS, while Bank of New Zealand cut its forecast by 50 cents to $5.20/kgMS, and AgriHQ's farmgate milk price dropped 45 cents to $5.05/kgMS.

Westpac Banking Corp kept its forecast at $5.40/kgMS, citing the beneficial impact of a weaker currency.

Still, ANZ says dairy companies' hedging policies mean the full benefit of a lower currency won't all accrue to the 2015/16 milk price.

(BusinessDesk)

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