Farmers warned as global dairy prices turn sour

By PHILIPPA STEVENSON agricultural editor

Falling international dairy prices are a sign that the world trade has swung from boom to gloom.

The turnaround has prompted dairy organisations to warn farmers to expect reduced returns from mid-year.

And economists say the drop will affect the New Zealand economy follow.

Deutsche Bank senior economist Darren Gibbs said the country would miss the "positive push" delivered by the rural sector over the past year which had kept New Zealand resilient in the face of a global downturn.

Fonterra global manager of trade strategy Nigel Mitchell yesterday said world dairy trade had gone off the boil.

For two years, until the middle of last year, a series of factors had reinforced each other to push prices up, particularly for milk powder.

The factors included tight milk supplies in the European market where falling export subsidies enabled prices to rise.

That led buyers, expecting prices to go even higher, to secure forward orders.

But, Mr Mitchell said, "You can't keep the pot boiling rapidly like that forever."

Market adjustment began in the middle of last year, sparked by reduced demand in key Latin America and Southeast Asia and a rebalancing of the European market.

Global export prices fell and buyers delayed further purchases in anticipation of even lower prices.

Mr Mitchell said factors were now combining to push prices down.

In October and November the EC increased export subsidies.

The US also increased its subsidies for skim milk powder.

Spot market milk powder prices have dropped from more than $US2000 a tonne to $US1600 a tonne.

Prices for butter and other cream products have followed, but less dramatically,.

Prices that were around $US1400 a tonne are now at $US1150 a tonne.

Prices for cheese have also fallen, from $US2200 a tonne to $US2000 a tonne.

Mr Mitchell said prices were back to levels last experienced in 1998/99 when skim milk powder fetched from $US1300 to $US1600.

'It's definitely not a situation where the sky is falling in," he said. "The fundamental outlook for the international market is still robust."

Massey University professor of agribusiness Bill Bailey said there had been a consistent slide in world dairy prices since September, but hope for a turnaround was still strong.

Mr Mitchell said an expected rise in milk production in New Zealand would have little effect on marketing. The impact of the devaluation of the Argentine peso on world dairy trade would be equally modest, he said.

Forward sales contracts and exchange rate hedging meant Fonterra's farmer shareholders were unlikely to feel the effects of the market slump until next season, which begins in June.

Fonterra chairman John Roadley told farmers in December that their final payout for the present season could be $5.40 per kilogram of milksolids, 40 cents higher than last season.

But he said the sharp fall in international prices would have an effect on the second half of this season's operations, affecting next season's payout. Deutsche Bank's Mr Gibbs said global prices were expected to fall further, and the ANZ commodity index for dairy prices was likely to drop by 5 to 10 per cent.