Sharechat Logo

Sliding dairy prices undermine Fonterra forecasts, may crimp NZ growth

Wednesday 16th July 2014

Text too small?

Prices of dairy products may extend this year's 34 percent slump, economists say, adding to pressure on Fonterra Cooperative Group to lower its milk payout forecast and taking some of the steam out of New Zealand's economic expansion.

The GDT Price Index dropped 8.9 percent to the lowest level since December 2012 in the latest GlobalDairyTrade auction, the 10th decline in past 11 sales. ASB rural economist Nathan Penny says his firm is reviewing its own forecasts for Fonterra's payouts to its farmers and the implications a reduced milk price would have for the economy.

"We haven't quite found that trough yet, but we do expect that it will emerge some time this year," Penny said. "We had expected dairy prices to stabilise a little sooner, or have clearer signs of stabilisation by now, so hence we're going to revise our forecast down for the milk price."

Elevated dairy prices propelled New Zealand's terms of trade to a 40-year high in the first quarter of this year, providing a major impetus to the nation's growth, though some economists say they may have peaked given the subsequent decline in prices of milk powder exports. Last month, ANZ Bank New Zealand downgraded its forecast for Fonterra's 2015 milk payout, estimating weaker prices would reduce dairy incomes by $3 billion in the season.

Exports of milk powder, butter and cheese make up 31 percent of New Zealand's total overseas shipments, based on government figures for the 12 months ended May 31, and surged 36 percent in that year. Dairy exports are almost three times more valuable than meat, the next-biggest commodity New Zealand sells to the world.

In May, Canterbury-based dairy processor Synlait Milk cut its earnings forecast for a second time, citing a high kiwi dollar and volatile world dairy prices. It followed Fonterra in lowering its milk payout forecast, saying the 2014 payout could be as low as $8.20 a kilogram of milk solids. Both dairy companies are projecting a lower payout of $7 per kgMS for 2015.

Synlait shares fell 2.3 percent to $3.34 and have shed about 13 percent this year. A2 Milk Co fell 1.5 percent to 67 cents.

"If falling dairy prices are telling us a picture of declining demand, in which previous spikes in price have led to demand destruction and expanding supply for demand, it's probably more of a negative for those that have been furiously building milk powder and infant formula plants," said Matthew Goodson, who helps manage $650 million of equities and property holdings for Salt Fund Management. "It's certainly a negative for the Synlaits of this world."

Units in Fonterra Shareholders' Fund, which give investors access to the company's dividends, rose 0.7 percent to $5.89. Milk is both an input and an output cost for Fonterra, which posted a 53 percent drop in first-half profit in March, saying the price of milk had run ahead of prices for products such as cheese and casein, shrinking its margins.

"It's probably a mixed impact for Fonterra, obviously milk price is an input so for Fonterra Shareholders' Fund its potentially a future positive, bizarrely, but it depends on the mix of movements in the basket," Goodson said.


  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

NZ dollar treading water as markets focus on Iran
MARKET CLOSE: NZ shares extend gain as passive funds bolster prices; Tourism Holdings climbs
NZ dollar headed for 1.3% weekly gain on expectations of a Fed rate cut
RBNZ knock-back gives Resolution chance to low-ball AMP - Jarden
Rail hubs may not boost Napier Port log trade
O'Connor looks to overhaul Biosecurity Act, improve animal tracing
Denton Morrell undefended at liquidation hearing
Contact steam to heat Norske Skog pellet business secured
Air NZ to amend booking engine after lawyer’s complaint
Ross McEwan to take helm at NAB

IRG See IRG research reports