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Fatter margins for dairy farmers fuel producer price inflation

Wednesday 20th November 2013

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Rising milk prices paid to dairy farmers fuelled growth in the prices producers paid and received in the third quarter, a period when Fonterra Cooperative Group twice hiked its forecast payout at the farmgate while batting off threats to its global reputation.

The output producers price index, which represents what producers are paid, rose 2.4 percent in the three months ended Sept. 30, its fastest quarterly gain in five years, and up from a 1 percent increase in the June quarter, according to Statistics New Zealand. Output prices were up 4.1 percent on an annual basis, the biggest increase in two years.

That was driven by a 29 percent lift in output prices for dairy cattle farming, reflecting strong international milk prices on high demand out of Asia. Dairy farmer output prices have climbed 54 percent in the year ended Sept. 30, the biggest annual gain since the series began in 1994.

Dairy product manufacturers' output prices rose 14 percent in the quarter on higher export prices for milk powder, the biggest quarterly increase since March 2010, and were up 37 percent in the year.

"This release won't be a direct concern for the RBNZ in terms of inflation (the more relevant Consumer Price Index was published last month)," Westpac Banking Corp economist Michael Gordon said in a note. "However, as we have been highlighting, the massive lift in dairy export income will have flow-on effects for the economy."

During the September quarter, Fonterra lifted its forecast payout to farmers by 80 cents to $8.30 per kilogram of milk solids in two separate reviews, while at the same time warning that its earnings might be at risk due to the rising cost of buying milk.

The world's biggest dairy exporter was embroiled in a false food scare in August, where its international reputation was put at risk by ultimately incorrect fears a potentially dangerous strain of bacteria had entered its supply chain.

The increased forecast milk payout underpinned a 2.2 percent advanced in input producer prices, which is what manufacturers pay, the biggest quarterly increase since March 2011, and up from a 0.6 percent rise in June. Input prices were up 3.3 percent on an annual basis, the biggest increase since December 2011.

Dairy product manufacturing input prices jumped 24 percent in the quarter, and were up 45 percent in the year, lagging the output prices increase and indicating a squeeze on margins. Dairy cattle farming input prices rose 0.5 percent in the quarter, and were 0.4 percent lower on an annual basis, indicating farmers were enjoying fatter margins in the period.

Electricity and gas input prices fell 5.9 percent in the quarter due to lower generation process on high lake levels, and output prices were down 4.4 percent in the period.

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