BNZ cuts forecast for Fonterra payout

Whole milk powder prices are expected to decline about 3 per cent at next week's GlobalDairyTrade auction.

Bank of New Zealand cut its forecast for Fonterra Cooperative Group's payout to farmers this season amid continued weakness in international dairy prices.

BNZ reduced its forecast for the 2015/16 season to $4.50 per kilogram of milk solids from a previous estimate of $5/kgMS, pushing it below Fonterra's current projection of $4.60/kgMS. The cooperative is due to review its forecast next month as part of government regulations.

Whole milk powder prices are expected to decline about 3 per cent at next week's GlobalDairyTrade auction, the third consecutive drop, according to NZX whole milk powder futures. International dairy prices remain weak as a decline in the euro makes the region's exports more competitive at a time of subdued demand, BNZ said.

This has compounded "the already negative influence of more EU milk supply associated with the removal of production quotas earlier in 2015 and the continuing Russian ban on EU [and US] dairy imports," BNZ senior economist Doug Steel said.

Analysts surveyed by BusinessDesk estimate Fonterra's payout could be between $4.25/kgMS and $5.30/kgMS, with three of the forecasts below Fonterra's $4.60/kgMS estimate.

BNZ's Steel said he expects reduced production and expanding demand to push up prices over coming years, and he retained his expectation for a 2016/17 forecast of $5.70/kgMS and a 2017/18 forecast of $6/kgMS.