Third low payout season will see dairyfarmers going under

OMF financial markets director Nigel Brunel is warning that dairy farmers’ second season of extremely low payouts may be followed by a third – with some going to the wall.

"This is already going to be the second season of very low prices for New Zealand farmers and can that be sustained?" Mr Brunel wondered. "Based on what we are seeing now and the fact that we are continuing to pump out milk, it might flow through to a third season which would be very bad. Some farmers will go to the wall this season and have gone to the wall because the banks won't support them continuing to make losses. It's pretty dire."

The price for New Zealand's key dairy product, whole milk powder, now looks likely to fall further, according to traders who are pricing in declines on the NZX futures market.

At this week's fortnightly GlobalDairyTrade auction, the price for whole milk powder sank 10.4% to $US1952 a tonne, its lowest since Aug. 18 when it hit a record low $US1590 a tonne. Prices on the NZX futures market today show contracts for February through May are all trading below the last GDT level, ranging from $US1755-1880 a tonne, implying prices will fall. From June, the futures contracts step up above $US2000 a tonne.

The prospect of milk prices falling further will put more pressure on an already stretched dairy sector. DairyNZ, the industry body which collects data from farmers, estimates 85% of New Zealand dairy farmers will post a loss this season as prices take longer than expected to recover to sustainable levels. Global milk supply continues to outweigh demand, as an El Nino weather pattern seems not to have dented local production as much as previously forecast, and as European milk volumes increase.

The next GDT auction is February 16, with the results published in the early morning of February 17 New Zealand time.

"Where we sit right now, it looks to be going lower," Mr Brunel said. "Whether that's the bottom, who knows. It could change but the futures are sitting at a discount to GDT so that would imply that we are going lower."

Unlike Europe and the US, which have large domestic markets, New Zealand exports the majority of its product and is, therefore, more exposed to international prices, he said.

"They are a little bit more insulated but we are not so much, so they continue to pump out milk and the production here in New Zealand is not as bad as people thought it would be, so there's more milk than they expected. It appears we are headed for lower prices."

Fonterra Cooperative Group, the world's largest dairy exporter and New Zealand's largest company, last week cut its 2015/16 forecast milk payout for farmers to $4.15 a kilogram of milk solids, from a previous estimate of $4.60/kgMS, and following a $4.40/kgMS payout last season. DairyNZ estimates the average farmer needs $5.40/kgMS to break even, and the Reserve Bank has flagged dairy sector debt as a growing risk to financial stability.

"If current prices indicated by the futures market are maintained, the farmgate milk payout would be lucky to hang on to $4," Mr Brunel said.

Today, ANZ Bank New Zealand, the country's largest rural lender, cut its milk payout forecast to $3.95 for 2015/16, citing increased supply and a gain in the kiwi dollar.

Mr Brunel said the recent increase in the New Zealand dollar wasn't helping. Analysts had expected a decline in the currency would help bolster local prices to farmers. However, the kiwi dollar has returned to favour after the Bank of Japan last week joined central banks in Europe, Sweden, Denmark and Switzerland in implementing a negative interest rate policy, increasing the allure of New Zealand's higher relative rates.

(BusinessDesk)