Double whammy for dairy exporter

Photo / Sarah Ivey

Vital export earner Fonterra is being hit with a double whammy of weaker international prices and a stronger exchange rate.

The average price of whole milk powder in Fonterra's monthly online auction yesterday was down 12 per cent compared with last month at US$1886 a tonne.

The farmer co-operative is the world's biggest dairy exporter and accounted for 25 per cent of national exports in the year to May 2008.

Kelvin Wickham, managing director of Fonterra GlobalTrade, said the prices were disappointing.

"I think they [buyers] are more uncertain," Wickham said.

"They're still buying and they're buying for the short term so they're replenishing their stocks and meeting their current customer demand but they're hesitant about buying longer and why wouldn't you be in this market?"

Fonterra expected to sell about 200,000 tonnes of whole milk powder using the auction during its first year, which was about 10 per cent of the company's exports from New Zealand.

International dairy prices were bouncing around the bottom of a cycle and, along with demand, were expected to remain flat during 2009 and improve in 2010, Wickham said.

"We need a sustained pick-up in customer and consumer demand to see any meaningful recovery in prices and that is not occurring as fast as we would like," he said.

"And there's increased uncertainty in the market because of the recent announcement of US subsidies and talk of European retaliation."

Improvement in prices since January had been overshadowed by the firming New Zealand dollar, he said.

The average price for whole milk powder dropped 4.1 per cent in the May auction but had increased in March and April by 16.6 per cent and 3.5 per cent respectively.

Fonterra last week forecast a payout to farmers for the 2009/10 season of $4.55 a kg of milksolids, down from $5.20 predicted for this season.

Fonterra's 2009/10 forecast assumed an exchange rate of about US59c and based on the expected production for this season could be worth about $5.8 billion - a potential drop of about $900 million on this season.

The exchange rate yesterday closed at US65.47c.

Fonterra said that as a rule of thumb a 1c movement in the exchange rate realised over a year was equivalent to about 10c on the milk price payout.

"You'd think that at some point the lower New Zealand dollar receipts coming back to the agricultural sector in New Zealand must have some bearing on the wider economy but those forces will play out when they play out," Wickham said.

The National Bank's Rural Report for June yesterday reaffirmed its forecast for an industry average payout in 2009/10 of $5.20 a kg.

The bank said its forecast might appear high against current prices for dairy commodities and the New Zealand dollar.

National Bank rural economist Kevin Wilson said the country's debt, current account deficit and economic growth suggested the currency should be weaker.

National Bank's payout forecast was based on an exchange rate of about US50c, Wilson said.

"We haven't started the new season yet, Fonterra's financial year doesn't start till the beginning of August ... and given the heightened volatility we've got at the moment anything can happen in 14 months."

ROCKY RIDE

Fonterra's online dairy platform

June
Price (tonne): US$1886
Change: -12 per cent

May
Price (tonne): US$2144
Change: -4.1 per cent

April
Price (tonne): US$2235
Change: +3.5 per cent

March
Price (tonne): US$2158
Change: +16.6 per cent

February
Price (tonne): US$1851
Change: -8.2 per cent

January
Price (tonne): US$2017
Change: -9.3 per cent