Fonterra payout forecast pared back as dairy prices tumble

Hopes for a high payout to dairy farmer's in autumn have faded. Photo / File

Economists have pared back their forecasts for Fonterra Cooperative Group's milk payout to its farmer shareholders for the current season after dairy prices tumbled in the overnight GlobalDairyTrade auction.

Last month, Fonterra kept its forecast farmgate payout at $6 per kilogram of milk solids, citing the rebalancing of demand and supply.

Overnight, the GDT price index, which covers a variety of products and contract periods, slid 6.3 percent from the previous auction two weeks ago to US$3,512 ($5,048), its lowest level since early last November.

Whole milk powder, which makes up the bulk of the auction, sank 12.4 per cent to US$2,782 a tonne.

Global dairy prices have become increasingly volatile in recent years as government subsidies and schemes propping up prices have reduced, allowing prices for more products to be set by the market.

For farmers, that's meant huge swings in prices, with Fonterra paying a record $8.40 per kilogram of milk solids in the 2013/14 season but just $3.90/kgMS for the 2015/16 season, below the level required by most dairy farmers to break even.

Economists had been more optimistic about the payout for the current season after milk prices recovered from their latest slump but have since lowered their expectations.

Westpac Banking Corp economist Sarah Drought said the overnight decline and a weaker near-term outlook for prices led Westpac to lower its forecast to $5.90/kgMS versus an earlier forecast of $6.20/kgMS.

"A few months back buyers were looking ahead to the New Zealand autumn, expecting a much tighter backdrop for supply and had been willing to pay a premium to secure product. But now, this has well and truly faded, with prices now firmly moving in the other direction," said Drought.

ASB Bank rural economist Nathan Penny said ASB revised down its forecast to $6/kgMS from $6.50/kgMS on the back of sliding dairy prices at the auction overnight. He noted the slide follows a partial turnaround in this season's production and "this season's weather risks have receded."

Recent rain in most parts of the country means the improvements in production are likely to be maintained over the remainder of the season. "As a result, we expect the price softness may remain over the coming auctions," said Penny.

Bank of New Zealand economist Doug Steel said milk powder prices have fallen as the supply outlook has improved. He said production declines in the European Union and New Zealand are showing signs of abating, while rain in the New Zealand has improved the late season outlook.

Those factors "diminishes previous upside risk to Fonterra's $6 milk price view." Steel said BNZ lowered its milk price forecast to $6.10/kgMS from $6.40/kgMS earlier in the week.

AgriHQ dairy analyst Susan Kilsby said farmers will be disappointed with last night's result. "To see prices falling again before the market has fully recovered will be a disappointment to farmers. While one poor result doesn't have a huge impact on the milk price it will be difficult for prices to recover quickly while there is surplus product available."