The co-operative reduced its estimate for output this season in New Zealand, the top milk-exporting country, to 1.589bn kilogrammes of milk solids, a 2% decline year on year.
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Whole milk powder prices have dropped to their lowest level since 2008, putting more downward pressure on Fonterra’s farmgate milk price forecast and reinforcing the market view that the Reserve Bank will cut interest rates twice this year to partly compensate.
Fonterra is reducing its NZ milk volume forecast for this season by 2 per cent to 1,589 million kilograms of milk solids. The extra amount is repayable to the company without interest for two years once the milk payment returns to more than NZ$6 a kilogram, it said.
“This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with”, he said, in a statement. “It would not surprise to see prices fall further in the coming weeks and months given the US Department of Agriculture’s expectation that global milk production will be a record 580 million metric tonnes in 2015”, said Nigel Brunel, director financial markets at OM Financial. “Prices will recover over the course of the season. We will update as the season progresses”.
Nonetheless, the New Zealand dollar was showing small gains against the dollar on Friday, of 0.2%, a rise attributed in part to the fact that the Fonterra price downgrade had been expected, but also to the farmer support package.
Chief executive Theo Spierings and chairman John Wilson are expected to release a downwardly revised forecast tomorrow and some economists predict the milk price could go as low as $3.50 a kg.
DairyNZ analysis showed the average farmer now needed a milk price of $5.40 to break even.
Fonterra, the world’s largest dairy exporter, has warned that current global dairy prices are “unsustainably low” and starting to hit production levels.
“As an OCD (Open Country Dairy) supplier I’ve been softened up a few weeks ago when OCD announced their $3.65 -$3.95 milk price”.
The support payment will cost NZ$430 million this half depending on take-up by farmers, and will be funded by one-off savings within the company, it said. “For the average farmer you are looking at covering a business loss of $260-280,000 this season but for many it will be a lot more than that”, he says.
With stronger beef prices farmers may look at incorporating an element of dry stock farming, particularly if dairy herd sizes are reduced, he said.
Fonterra’s 10,500 farmer supplies are not the only ones feeling the pain.
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Stan McCarthy said the collapse in prices has yet to feed through completely to suppliers but if the low prices continue through the end of this year then the problems will only get worse.
