Markets

New Zealand Braces Itself for NZ$1.8 Billion Milk Price Cut

NEW ZEALAND - The up and coming 2014/15 dairy season will require belts to be tightened in light of major reductions to forecast milk prices, New Zealand farmers are being cautioned.

1 August 2014

2 minute read

Europe

Reductions announced by Fonterra and Westland this week will cost farming NZ$1.825 billion nationally and NZ$484 million to Waikato alone, with ramifications expected to extend to urban centres.

This is the guidance of farming advisors and commentators reacting to a surprisingly large price fall, leaving Fonterra’s price at NZ$6 per kilo of milk solids, down from NZ$7.

Farmers must react by reforecasting farm budgets as production costs and revenue slide closer together, Federated Farmers dairy chair Andrew Hoggard said this week.

“While the size of the drop is a surprise the revision wasn’t, given GlobalDairyTrade’s slide over much of the current season,” said Mr Hoggard.

“Several weeks ago we agreed with the banks it could be in the NZ$6 to 6.25 kg/MS range but we thought it would have been a less severe haircut.”

However, Mr Hoggard reassured that economists are expecting a progressive lift in payout as the season unfolds.

Meanwhile, farmers should be controlling costs through contingency plans should a dry summer period arrive.

Dairy New Zealand has advised once a day milking and early culling rather than turning to supplementary feeds.

DairyNZ chief executive Tim Mackie said: "While it is unclear where prices could be at the end of the season, volatility requires farmers to be prepared to react to changes quickly."

"Look at where the fat can be trimmed and where efficiency gains can be made, for instance growing and utilising more home-grown feed and looking at where supplementary feed can be reduced."

A global decline in milk price, a high New Zealand dollar and faltering emerging market demand under higher prices at the start of the year are among reasons cited by processors for the revisions.

Fonterra’s collections have been 8.3 per cent higher this year than last and China’s inventories building up have further eased milk demand.

Westland Milk Products chief executive Ron Quin highlighted a good northern hemisphere season as another factor.

“The market has continued to decline as customers limit their purchases due to higher inventories in their supply chains, and growth in milk and dairy product supply from Europe and the USA."

He added that the ‘signs are slightly more encouraging’ going forward as to whether the industry was at the bottom of the price cycle.