17 Jul 2014

Dairy drop to hit wider economy

6:46 am on 17 July 2014

The fall in dairy prices will have a significant flow-on effect on the wider economy, a dairy farming representative says.

Federated Farmers dairy vice-chair Chris Lewis said the fall in prices in the GlobalDairyTrade of almost 9 percent this week opened up the possibility Fonterra would drop its $7 per kilo milk payout forecast for the new season by 50-70 cents.

Dairy farming, and many businesses in provincial centres, were in for a lean time as farmers cut spending - unless there was a pick-up in international dairy prices later in the season.

"I dare say that a lot of manufacturing, and a lot of trade-related agricultural companies in the provinces and probably in Auckland too, will be looking at this very carefully and they'll probably be deciding not to hire any more staff for their current work load and maybe stretch it out, because they know it will drop off very very quickly," Mr Lewis said.

The Reserve Bank would also need to consider the billion-dollar economic impact in its interest rate reviews, he said.

"Hopefully they won't put up the interest rates any more. They could factor in a rate drop, because it's that significant, compared with last year.

"If you look at a $6.25 or $6.50 payout, compared to $8.50 this year, by the amount of of milksolids, that's billions of dollars out of the regional economies."