Fonterra faces 'substantial' drop in milk production before seasonal peak as farmers adjust to low prices

Fonterra Cooperative Group's [NZX: FCG] milk production has dropped heading into the seasonal peak as suppliers to New Zealand's largest commodity exporter respond to low dairy prices by winding back their output.

Fonterra's milk intake for September, when production typically ramps up ahead of the peak in mid-October, was 8.7 percent below the year-earlier month, the Auckland-based cooperative said in a statement. Its intake for the season to date, from June through September, was down 5.3 percent from a year earlier.

Farmers have cut production in response to Fonterra's lower payout forecast for the current season. Fonterra last month raised its forecast payout to $4.60 per kilogram of milk solids, from what would have been a decade-low $3.85/kgMS, in response to improved international demand and lower local production. Dairy product prices climbed in last week's GlobalDairyTrade auction for a fourth consecutive time, after nearly six months of declines.

"When Fonterra announced that the payout was going to be under $4, that caused a lot of farmers to have a really good look at their costs, they culled cattle and they reduced costs and they looked to reduce production," said OMF financial markets director Nigel Brunel. "They reduced production because you can't keep producing milk at a loss. This is the very first indication that milk production is down and it's down substantially."

Fonterra's North Island milk intake is 9.7 percent below September last year and 5.7 percent lower for the season to date, the company said. In the South Island, the company has collected 6.7 percent less milk in September and 4.3 percent less for the season to date.

Unfavourable spring growing conditions in some parts of the country had also impacted New Zealand milk production, Fonterra said.

In Australia, Fonterra has collected 1 percent more milk in September, with season-to-date volumes up 1.9 percent, it said.

Fonterra, the world's largest dairy exporter, said the rate of milk production growth from major exporting countries had eased as farmers globally respond to lower dairy prices. Solid demand growth is being seen in Asia as China returns to steady import growth while the Middle East and Africa have slowed, it said.

(BusinessDesk)