19 Apr 2012

Sharp drop forecast for next season's dairy earnings

11:48 am on 19 April 2012

Analysts have cut forecasts for next season's payout to dairy farmers in what could be a billion-dollar blow for the economy.

The downgrades came after prices fell 10% at Fonterra's latest fortnightly auctions, taking falls since January to close to 20%.

Agri-Fax is picking a milk payout next season, before dividends, of $5.90 per kilo of solids, down from a forecast $6.50 this season.

Fonterra's forecast is not due until next month, but ANZ National Bank's chief economist Cameron Bagrie says the signs are not good.

"Given the numbers we saw overnight, certainly I think it is a little bit eye- opening and it flags to me that the 2012-13 payout is no longer a risk of having a five in front of it; it will have a five in front of it."

Mr Bagrie says a payout cut of that size could strip hundreds of millions of dollars out of farmers' pockets, and close to $1 billion in spending from the wider economy.

Surge in supply accounts for fall

A surge in supply has prompted the fall in prices. Fonterra's global dairy trade-weighted price index fell 9.9% on Tuesday night to an average selling price of $US2983 a metric tonne - the largest fall since July 2010.

Prices declined for all products, led by an 11% fall in the price of whole milk powder.

Fonterra says the drop reflects increased global milk production, including record milk volumes in New Zealand over the last year due to good growing conditions.

The cooperative says it is also auctioning more product, which has dampened prices, but notes that demand remains steady.

Milk powder prices more aligned

BNZ economist Doug Steel says the cost of New Zealand milk powder has moved closer to that of Europe and the United States.

"European and US prices have been markedly lower than what we've been achieving in global dairy trade."

Mr Steel says global milk supply has increased, particularly from Europe, the US and Argentina, and demand has eased from China.

He said in the medium term prices are not likely to bounce back, as the extra supply and soft demand will hold prices down for the foreseeable future.

Fonterra is currently forecasting a payout to farmers of $6.75 to $6.85 per kilogram of milk solids this season.