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Fonterra likely to reduce 2015/16 milk payout after weak start to 2016

Wednesday 20th January 2016

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Fonterra Cooperative Group is widely expected to cut its forecast milk payout for this season after prices dipped at a second successive GlobalDairyTrade auction this month.

The GDT price index fell 1.4 percent at last night's auction, following a 1.6 percent decline at the previous fortnightly auction. The average price for whole milk powder slid 0.5 percent to US$2,188 a tonne, still short of the US$3,000 a tonne for whole milk powder that Fonterra has said is needed to support its current forecast for the 2015/16 season of $4.60 per kilogram of milk solids. 

Expectations for Fonterra's payout currently range between $4.10/kgMS-$4.60/kgMS, according to a BusinessDesk survey of agricultural economists and dairy market analysts. Most have turned more pessimistic about the current season's prospects following the latest auctions, and all except one of the estimates is below Fonterra's current forecast. Fonterra has previously said its forecast was dependent on global dairy prices rising in the first half of this year. That's so far failed to happen, with supply continuing to exceed demand.

"Our overriding view is that strong growth in global milk supply combined with subdued demand from China, is likely to keep a lid on prices for much of this year," Westpac Banking Corp senior economist Anne Boniface said in a note, where she reduced her estimate for the current season to $4.20/kgMS from $4.50/kgMS.

While the latest auction wasn't as weak as feared, dairy prices over January have still been weaker than the bank had pencilled in its forecasts, Boniface said.

The previous forecast "was based on the potential for an El Nino induced drought to impact on New Zealand milk production. But after decent rainfall in many parts of the country so far this year, the risk of a severe drought appears to be receding," she said. "As we get further past the peak production period, even if dry weather set in now, overall milk production would be less at risk."

Open Country Dairy, the country's second-largest dairy processor, last week reduced its milk payout by 30 cents to an average price of between $4.00-$4.30/kgMS.

ASB Bank rural economist Nathan Penny also trimmed his forecast for the current season to $4.10/kgMS from $4.60/kgMS.

Given that more than 60 percent of this season's volumes are already sold, Penny said the benefits of any pick up in prices are now likely to accrue next season, when he is picking a payout of $6.50/kgMS.

Dairy products are New Zealand's largest commodity export and lower global prices are putting pressure on the nation's dairy farmers, weighing on the outlook for economic growth and putting dairy sector debt on the Reserve Bank's radar as a growing risk to financial stability.

Federated Farmers also joined the chorus of concern about Fonterra's milk payout today, saying it's looking increasingly out of reach after the latest auction.

"It is still possible that a sudden upswing in prices could get us there, but we’d need to see some very large increases in the next couple of months to reach the $4.60 mark," said the organisation's dairy chair Andrew Hoggard. "Even that is a fairly poor payout for most farmers, and falling below that is just going to ramp up the pressure on the dairy industry and those that support it."

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