BNZ cuts forecast for Fonterra 2015/16 payout, citing weak international dairy prices

Friday 13th November 2015

Bank of New Zealand cut its forecast for Fonterra Cooperative Group's payout to farmers this season amid continued weakness in international dairy prices.

BNZ reduced its forecast for the 2015/16 season to $4.50 per kilogram of milk solids from a previous estimate of $5/kgMS, pushing it below Fonterra's current projection of $4.60/kgMS. The cooperative is due to review its forecast by early December as part of government regulations.

Whole milk powder prices, which are key to Fonterra's payout, are expected to decline about 3 percent at next week's GlobalDairyTrade auction, the third consecutive drop, according to NZX whole milk powder futures. International dairy prices remain weak as a decline in the European currency makes the region's exports more competitive at a time of subdued demand, BNZ said.

"International dairy prices have come under renewed downward pressure over recent weeks," BNZ senior economist Doug Steel said in a note titled 'Dairy Price Volatility Extreme'. "Near term indicators are extremely weak. This seems associated with developments in the EU.

"This has put downward pressure on world dairy prices. It compounds the already negative influence of more EU milk supply associated with the removal of production quotas earlier in 2015 and the continuing Russian ban on EU (and US) dairy imports."

Further declines in oil and grain prices in recent weeks was likely to also be weighing on dairy prices, he said.

Analysts surveyed by BusinessDesk estimate Fonterra's payout could be between $4.25/kgMS and $5.30/kgMS, with three of the forecasts below Fonterra's $4.60/kgMS estimate. That compares with the previous survey on Nov. 4 when only one of the six was below Fonterra's forecast. Westpac, which is currently at the top of the range, expects to review its forecast next week.

BNZ's Steel said he expects reduced production and expanding demand to push up prices over coming years, and he retained his expectation for a 2016/17 forecast of $5.70/kgMS and a 2017/18 forecast of $6/kgMS.

BusinessDesk.co.nz

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