Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, cut its milk price forecast to a nine-year low as weak demand and oversupply continue to depress the global market.
The Auckland-based company dropped its estimate for the 2015-16 season to NZ$4.15 ($2.67) a kilogram of milksolids from NZ$4.60, according to a statement Thursday. It now expects to pay its 10,500 farmer suppliers between NZ$4.50 to NZ$4.55 a kilogram of milk solids inclusive of dividends.
"There is still an imbalance between supply and demand which continues to put pressure on global milk prices,” Chairman John Wilson said in the statement. “Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase.”
Increased milk supply and lackluster demand in China pushed dairy prices to a 12-year low in August before they stabilized after Fonterra reduced the amount it sells at auctions. This season’s milk payout is now forecast to be the lowest since 2007, putting more stress on farmer cash flows and curbing New Zealand’s economic growth.
“Not only will this strip a further NZ$800 million from dairy sector revenues this season, it is a clear warning that next year’s payout expectations need to be lowered further,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “The payout will remain too low for a significant number of farmers to break even.”
New Zealand farmers cut herd numbers and reduced supplementary feeding after Fonterra indicated this season’s payment could be as low as NZ$3.85. As the outlook for milk production declined and global prices stabilized, the company in September increased its outlook to NZ$4.60.
Today’s reversal “is a sobering blow” for farmers, said Duncan Coull, chairman of the Fonterra Shareholders’ Council.
The New Zealand dollar eased on the news, which came ahead of a central bank rate decision. Shares in the Fonterra Shareholders’ Fund, which tracks the cooperative’s earnings and dividends, fell 2 cents to NZ$5.85 at 1:40 p.m. in Wellington.
Fonterra sees dairy prices improving later this calendar year, Chief Executive Officer Theo Spierings said in the statement.
"However, the time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices,” he said in the statement. “These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.”
Fonterra doesn’t expect a sharp recovery in Chinese demand any time soon, Kelvin Wickham, managing director for global ingredients, said on a conference call.
“China is growing but it’s not going to suddenly lift its import requirements in the near-term to make dramatic change to all this surplus milk on the world market,” he said.
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