The downturn in the global dairy industry continues to hit home in Australasia with NZ’s Fonterra (FSF) cutting the price it expects to pay its farmers for milk for the second time in as many months thanks to persistent oversupply of dairy driving world prices lower.
In fact there’s something of a parallel with the experience in the Seaborne iron ore market where oversupply and a lack of growth in demand has sent prices crashing. Dairy prices globally are down by well over 50% in the past year to 18 months, while iron ore prices are down 67%.
Fonterra is the world’s biggest dairy exporter and the second-biggest dairy processor in Australia (through Bega and its own operations here) and yesterday morning it revealed it was cutting its 2014-15 farmgate milk price forecast by NZ10¢ to to $NZ4.50 ($A4.23) per kilogram of milk solids, the lowest level in eight years.
Fonterra’s farmer payment has dropped from a record $NZ8.40 a kilogram last season.
Chairman John Wilson said the cut, which follows on from a NZ20¢ cut in April, reflected the slide in global prices, especially for milk powder.
“World markets are oversupplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago,” Mr Wilson said in yesterday’s statement.
"This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions."
Fonterra’s latest cuts come two weeks after Bega Cheese (which is controlled by Fonterra) cut its 2014-15 profit guidance thanks to weak world prices.
FSF 1Y – Fonterra struggling in a ‘world oversupplied with dairy’
Fonterra CEO Theo Spierings said he saw the longer term fundamentals supporting a strong outlook for dairy.
"Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the co-operative’s performance," he said.
Fonterra said that it expects to pay its Kiwi farmer-owners a farmgate milk price of $NZ5.25 a kilogram for the season ending May 2016.
"We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season," Mr Wilson.
"However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement."
Global dairy prices have slumped to a five-year low after booming to record highs 18 months ago.
Despite the price cut, Fonterra maintained its estimated dividend for the financial year ending July 31 of NZ20-NZ30 cents a share.
NZ economists say because of the staged nature of payments from Fonterra and other dairy groups (farmers will receive 70% of the return until next February when it will start rising), the Kiwi dairy industry and economy generally will see a slowing in income growth for the next six to nine months.
For that reason they expect the Reserve Bank of NZ to start cutting rates next month or in September.
