'Tough season' for dairy farmers

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See also: Fonterra slashes milk price payout forecast

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, has slashed its farmgate milk price for the 2015/2016 season by $1.40 to $3.85 per kilogram of milk solids after being surprised by the persistent global imbalance between demand and supply.

Following a board meeting today, the Auckland-based company's chairman John Wilson said current prices are "unsustainably low and we are seeing them beginning to impact production levels," and should recover over the course of the season. "However it will be a tough season for our farmers," he said.

At that level the payout, the lowest in nine years, puts downward pressure on New Zealand's faltering economy. Every $1 decline in the milk price equates to around a $2 billion decline in farmer incomes which, in turn, impacts the regional and national economies.

Few farmers will be able to make a profit at such a low milk price with Dairy NZ estimating $5.70/kgMS is the industry average breakeven point for most farmers.

Fonterra said it was doing something to help them out with an additional 50 cents per shared-up kilograms of milk solids, which it estimates will cost up to $430 million in the first half of the season.

The payout cut had been expected, given the plummeting of dairy prices this year due to oversupply and weak demand, particularly from China. Many analysts had lowered their forecasts to less than $4/kgMS and the AgriHQ 2015/2016 Farmgate Milk Price dropped to $3.34/kgMS following the latest GlobalDairyTrade auction this week where the price of whole milk powder, New Zealand's key commodity export, sank 10 percent to US$1,590 a tonne.

Fonterra's 10,500 farmer supplies are not the only ones feeling the pain. Open Country Dairy, the country's second-largest milk processor, last month cut its milk payout by more than $1 to between $3.65-$3.95/kgMS and Westland, the country's second-largest cooperative, cut its forecast milk payout by $1 to between $4.60-$5/kgMS. The only one that hasn't so far is small Waikato-based Tatua, which recently reconfirmed its opening forecast of $6/kgMS despite the volatility in global dairy prices.

Following an ongoing strategic review, Fonterra last month announced 523 jobs would go in the first swathe. Another undisclosed number of staff members were told on Wednesday whether they still had jobs, with more to come. The final number of job cuts will be confirmed in September.

Units in the Fonterra Shareholders' Fund increased 0.6% to $4.69, and have fallen 22% in the past year.

(BusinessDesk)

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