Payout could drop further on dairy slump

A milk tanker leaves the Te Rapa Fonterra Dairy Factory. Photo / Christine Cornege

Fonterra's annual milk payout could be cut back as a result of the latest tumble in global dairy prices, an economist says.

Westpac senior economist Anne Boniface said the 8.4 per cent drop in the GlobalDairyTrade index overnight created a "clear risk" that the 2014/15 payout could fall below the bank's current forecast of $6 per kg of milk solids.

Fonterra is also forecasting a $6 per kg payout, which it reduced from a previous forecast of $7 last week.

"We'd prefer to see another auction before formally cementing in a new forecast," Boniface said. "There is still a lot of water to go under the bridge before the end of the 2014/15 season and as we've seen, commodity prices can be volatile in both directions."
But she said the "downside risks" to the forecast were clear.

"The further dairy prices fall, the more difficult it is for prices to stage a rebound of the magnitude we have factored into our forecasts, particularly in the absence of usual catalysts such as drought, rocketing grain prices or some other disruption to the outlook for supply," Boniface said.

Last week's reduction in the forecast payout represents a total drop in payments to farmers of nearly $1.6 billion from Fonterra's earlier forecast and a cut in farmers' collective income of roughly $4.3 billion compared with last season's record pay-out, according to Westpac.

Dairy product prices slumped to the lowest level since October 2012 in the latest GlobalDairyTrade auction, paced by whole milk powder and cheddar.

Since the last auction three weeks ago, Fonterra has slashed its forecast 2015 farmgate milk payout to $6 per kilogram of milk solids from $7/kgMS, citing strong global production, a build-up of inventory in China and falling demand in emerging markets.

See more details of last night's auction here.

The ANZ Commodity Price Index fell for a fifth month in July, led by a 12 per cent drop in whole milk powder.

The GDT price index dropped 8.4 percent to US$3,025 a tonne, down from US$3,309 a tonne three weeks ago. Some 48,380 tonnes of product was sold, up from 36,656 tonnes three weeks ago.

In the latest GDT auction, whole milk powder shed 11.5 percent to US$2,725 a tonne, while cheddar dropped 10.2 percent to US$3,742 a tonne.

Butter milk powder sank 10.1 percent to US$3,852 a tonne, and butter declined 9.6 percent to US$2,800 a tonne.

The big slump has been driven by large Chinese stockpiles, but demand for milk powder will eventually bounce back, one dairy analyst said.

Agrifax senior dairy analyst Susan Kilsby said it was disappointing that whole milk powder prices were down by so much - a drop of 11.5 per cent.

"It is really disappointing, because we've seen quite a lot of strength in other dairy markets around the world," she told Radio New Zealand."In the US, some of the products are at record prices at the moment. But there we're talking cheese and butter, and the whole milk powder market is quite a different story, very much driven by supply out of New Zealand and buying out of China."

Kilsby said China had bought a lot of product earlier in the season and was still working through those supplies."So while they are still buying some product, they're not buying enough product to put any upwards pressure on prices. So we're just seeing these really weak results on GDT at the moment."

However, the long-term outlook for the Chinese market was still very strong."It's just a matter of time for this process to work itself out and these stocks to be cleared," she said."We definitely are expecting it to bounce back."

Federated Farmers dairy chairman Andrew Hoggard told Radio New Zealand the drop was "not pleasant".

However, the GlobalDairyTrade price was not what farmers got paid. Those prices are set by dairy co-operative Fonterra, which dropped its payout from $7 to $6 per kilogram of milk solids last week.

Hoggard said the latest auction gave farmers an indication of what prices products would fetch."And that gives us an indication as to whether or not things might be going down or up in terms of the milk price that we get paid, so it's a good indicator of whether we need to tighten things up in the business, or whether we can afford to look at capital expenditure or not in the coming seasons.

"The full impact of the GDT drop might not be felt until later, if Fonterra dropped the milk price further."They are linked, but there is a lag effect. And if the GlobalDairyTrade turns around quite quickly and comes right, then we may not actually see a change."

Skim milk powder fell 6.5 percent to US$3,264 a tonne, while rennet casein slipped 0.7 percent to US$9,701 a tonne.

Anhydrous milk fat jumped 6.0 percent to US$3,457.

Neither lactose nor milk protein concentrate were offered at the event.
The New Zealand dollar was trading at 84.76 US cents before the release. It dropped as low as 84.52 cents and was recently trading at 84.59 cents.

-with Matthew Backhouse