Dairy price plunge 'a kick in the guts' for farmers

Federated Farmers dairy chair Andrew Hoggard says a major drop in prices at last night's GlobalDairyTrade auction is "a kick in the guts" for farmers.

"There's no way to dress this up as anything but a kick in the guts," said Hoggard.

International dairy prices fell back to levels not seen since May 2012 at the overnight GDT auction, bringing with it a fresh wave of selling in an already weakened New Zealand dollar.

The GDT price index dropped by 7.3 per cent since the last auction to US$2599 a tonne, making for a 48.5 per cent decline since prices peaked in February.

"Unlike most of our competitors who are subsidised there's not one Kiwi farmer looking for a hand-out. We may not like what prices are doing but we know this is market forces at work and while it often runs in our favour, this season it isn't," Hoggard said.

He said "dislocated European milk" resulting from the crisis in war-torn eastern Ukraine was having a big impact on international dairy prices.

"This is the auction result that brings the chickens roosting in the Eastern Ukraine home to us on-farm."

In wholemilk - the most important product for New Zealand dairy farmers - the price of powder fell by 10 per cent to US$2443 a tonne since the last auction two weeks ago.

Last week, Fonterra said it had revised its forecast farmgate milk price for 2014/15 to $5.30 a kg of milk solids from a previous forecast of $6.00 a kg.

The cooperative said then that wholemilk powder prices would need to reach US$3500 a tonne by March next year if the forecast was to be achieved.

The price of skimmed milk powder - an important line for the country's second biggest dairy co-operative - Westland Milk - fell by 2.7 per cent to an average price US$2,540 a tonne.

Price falls were across the board. Buttermilk powder prices dropped by 11.3 per cent to US$2723 a tonne and sweet whey powder prices by 9.3 per cent to US$1,175 a tonne.

BNZ currency market strategists said the New Zealand dollar, having pushed higher to US78.60c last night, fell to as low as US77.80c after the GDT result. By early morning the currency had regained ground to trade at US78.00c.

AgriHQ dairy analyst Susan Kilsby said stocks of dairy commodities were building across the globe due to Russia's current ban on importing dairy products from many Western nations, and a lack of urgency from Chinese buyers, while at the same time global milk supplies are expanding.

The AgriHQ Seasonal Farmgate Milk Price for the 2014-15 season fell by 5 cents to $5.05 per kg of milk solids following the GDT auction, indicating that if the latest GDT prices were achieved across the entire season the milk price would be just $3.90/kg.

"The volume of whole milk powder being offered on GDT is at its seasonal peak and buyer demand is simply not strong enough at present to clear the large volumes without prices being impacted," Kilsby said in a research note.

"A farmgate milk price of $5.05/kgMS means that most farms will be barely covering costs of production meaning there will be virtually no cash available for debt repayments or discretionary spending such as upgrading plant and equipment," according to Kilsby.

ANZ rural economist Con Wiliams said the failure of global dairy prices to recover added further downside risk to Fonterra's already-reduced 2014/15 milk price forecast.

Based on the auction's outcome, ANZ reduced its forecast for the 2014/15 payout to $4.85/kg, "assuming a modest bounce back in global prices".

"This sits well below the average cost of production for farmers and will have a significant impact on discretionary spending," ANZ rural economist Con Williams said. ANZ estimated that about 70 per cent of the dairy sector has exposure to floating interest rates.

"A lower dairy price also has significant implications for the wider economy and monetary policy," ANZ said.

with BusinessDesk