Further declines in dairy prices at last night's GlobalDairyTrade auction have prompted most analysts to pull back their expectations for Fonterra Cooperative Group's payout to farmers for this season to below $4 per kilogram of milk solids,
Further declines in dairy prices at last night's GlobalDairyTrade auction have prompted most analysts to pull back their expectations for Fonterra Cooperative Group's payout to farmers for this season to below $4 per kilogram of milk solids, which would make it the lowest in almost a decade.
Analysts have lowered their forecasts for the current 2015/16 season after the price for whole milk powder, New Zealand's key commodity export, sank 10.3% to $US1590 a tonne in the GlobalDairyTrade auction overnight. Many of the products offered at auction failed to move from the opening prices, which are set at 15% below the previous auction price, indicating lacklustre demand.
The AgriHQ 2015/16 Farmgate Milk Price dropped to $3.34/kgMS following the latest auction, from $4.22/kgMS after the previous auction three weeks ago. ANZ Bank New Zealand reduced its forecast to $3.50/kgMS, Westpac Banking Corp dropped its estimate to $3.70/kgMS, Bank of New Zealand held its estimate at $3.80/kgMS while highlighting the downside risk, and ASB Bank lowered its estimate to $4/kgMS but said it would likely rise to $4.50/kgMS by the end of the season as sentiment rebounds amid tighter supply and improved demand.
Auckland-based Fonterra is expected to update its $5.25/kgMS forecast for the current season following its board meeting on Friday. The current level of its forecast is based on the assumption prices would head back toward $US3500 a tonne in the coming year. Speculation of a payout below $4 comes after a $4.40/kgMS payout in 2014/15, and would be the lowest since the 2006/7 season when farmers received $3.87/kgMS. Dairy NZ estimates $5.70/kgMS is the industry average breakeven point for most farmers.
"Farmers now face two consecutive seasons of extremely low milk prices," said AgriHQ dairy analyst Susan Kilsby. "Very few farmers will be able to turn a profit at such a low milk price."
Ms Kilsby said every $1/kgMS drop in the milk price equates to about $2 billion less income for dairy farmers. Economists say a reduced payout will hit the nation's economic growth, lower the terms of trade further and widen the current account deficit. The Reserve Bank, which is expected to lower interest rates further after reducing the benchmark at each of the last two meetings, has said a second year of low payouts would be a concern for the New Zealand economy, especially for the quarter of dairy farmers currently trading with negative cash flow.
Continued weakness in dairy prices is being driven by increased supply from New Zealand, Australia, Europe and the US, lacklustre demand in China and an import ban in Russia. The lower prices come just as New Zealand production is rising, heading into the country's peak supply period in October.
"Given that the next seven auctions account for a significant chunk of annual (GDT) whole milk powder sales, it doesn't take a rocket scientist to work out that auction prices in the next two months will weigh heavily on the final milk price outcome for the 2015/16 season," ANZ senior economist Mark Smith and senior FX strategist Sam Tuck said in a note.
"The current $5.25/kgMS forecast may have looked reasonable a few months ago but developments move quickly in commodity markets. Signs are not looking good with the likelihood of a second successive season of low dairy incomes looking to be an inevitability."
(BusinessDesk)
