Dark days for dairy farmers amid falling prices

Farmers will be revisiting their budgets after the latest GlobalDairyTrade auction saw whole milk powder prices fall to levels not seen since last August's slump.

Fonterra's latest farmgate milk price forecast is under downward pressure after dairy prices fell for the third time in a row, this time by 7.4 per cent.

Whole milk powder prices - which are key to determining Fonterra's farmgate milk price, fell by 10.4 per cent to US$1952 ($2990) a tonne.

Fonterra last week cut its farmgate milk price forecast for the 2015/6 season to $4.15 a kg of milksolids from a previous forecast of $4.60 a kg in response to weak international prices. The average break-even point for most farmers has been estimated at $5.40 a kg.

The key factors driving dairy demand are a big supply/demand imbalance. In addition, declining international oil prices have weakened the spending power of countries reliant on oil revenues, while economic uncertainty in developing economies and a slow recovery of dairy imports into China have played a big part.

DairyNZ estimates 85 per cent of dairy farmers will lose money this season compared with 49 per cent last season. The drop of 45c per kilogram of milk solids to $4.15/kgMS for the 2015/16 season meant an $800 million drop in the industry's dairy revenues, or $67,000 less in cash revenue for the average farm.

The Federated Farmers Waikato provincial president, Chris Lewis, said farmers would be taking a long, hard look at their budgets before the season ends on May 31.

"Most farmers, including those who work in the industry, will be doing their sums as to what the future looks like," Lewis said. "In the next six weeks a few decisions are going to be made because June 1 is the new season. Whether that means a change of staff, a change of sharemilker, jobs or whether farms get sold - that [date] is the line in the sand."

Lewis said farmers would be looking closely at their systems - their farm inputs - and the herd numbers, adding there might be a further round of culling after last calendar year's abnormally big cull.

ANZ rural economist Con Williams said it was difficult to see an imminent turnaround in prices.

The latest auction would place pressure on Fonterra's already downwardly revised milk price for 2015/16 and would weigh heavily on the opening milk price forecast for 2016/17, Williams said.

Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy, said Fonterra's moves to reduce the amount of product it puts up for sale on the GDT platform had not produced the desired price response, and low values had not translated into increased demand.

Eric Meyer, the president of HighGround Dairy, said milk production around the world -- after months of low prices - had not fallen apart and was still growing in many regions. "Europe is obviously the big game here, with November production up 5 per cent, and expectations are for December that it will be about the same," Meyer said.

Hear Agribusiness Editor Jamie Gray discuss this morning's auction on NewstalkZB's Early Edition:

"Their numbers [for the December quarter] will be exceptional."

It was a similar story in the United States, where year-on-year production is climbing slightly instead of trending lower.

And in New Zealand production is better than expected because of the rain since the New Year.

Dairy farm debt hit $37.8 billion in June from $34.6 billion the year before as farmers sought more working capital to cover their losses.