Fonterra’s new season forecast below break-even.

Dairy farmers face two successive years of below-break-even payouts after Fonterra issued its forecast for 2015/16 yesterday, raising questions about whether the sector may have reached the end of what has been a highly successful era.

As memories of the record farmgate milk price of $8.40 a kg of milksolids for 2013/14 start to fade, farmers are now bracing for a farmgate milk price of $4.40 for the current season - the lowest in eight years - rising to $5.25 in the 2015/16 year.

Chairman John Wilson said the downwardly revised forecast for the current season, ending May 31, from the previous forecast of $4.50 reflected the reality that global commodity prices had not increased as expected.

Read also:
NZ dollar drops to four-year low on concern low Fonterra payout will dent economy
Fonterra cuts payout forecast


"World markets are over-supplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago," he said.

"This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions."

Demand out of China has dropped like a stone and production is still increasing in nearly all the world's major milk producing regions of the world.

Westpac senior economist Michael Gordon said he doubted today's prices would be a permanent fixture "but I do get a sense that things in the international market have shifted".

"We had a patch from 2008 to 2013 where China's demand was growing pretty rapidly and New Zealand was the only one that could take advantage of that.

"Other producers were slow off the mark in terms of picking up their own production, and higher prices have really encouraged the rest of the world to get its act together.

"In future we will probably see the global milk supply be a lot more responsive to changes in demand, so the days of $7 or $8 payouts are probably in the past. That short-term advantage was not going to last forever and we are probably at a stage where global milk production is going to be matching demand growth more closely."

ANZ Bank rural economist Con Williams said the sector was in for prolonged downturn but that a return to the heady days of 2013/14 could not be ruled out, given the volatile nature of the market.

The sector had gone through some changes on the global stage, with increased production in the United States, China becoming less dependent on imports, the loss of the Russian market and Europe adding more powder producing capacity.

Low grain and fuel prices had also altered the costs equation for many. Williams said that, given the volatility of dairy markets, a return to $8 payouts could not be ruled out.

Fonterra's chief financial officer Lukas Paravicini said he believed low prices would be temporary. He believed the market was moving more into balance, as indicated by the co-operative's $5.25 kg forecast for 2015/16. It was only a matter of time before low prices translated into lower production, he said.

"I do believe that the price signals that the market has given will have an effect going forward on volumes in New Zealand and in Europe," he said.

"I think that over the next few years we will tend to see prices back to the long-term average [around US$3500 a tonne for wholemilk powder]."

At the last GlobalDairyTrade auction, wholemilk powder traded at US$2390 a tonne.

"Underlying supply and demand will balance itself in favour of the dairy industry, but it will take one or two seasons, if not more, to get there."

Fonterra Forecast

• Current season forecast revised down to $4.40 a kg from $4.50.

• Opening forecast for 2015/16 of $5.25 a kg.

• Dairy NZ estimates of break even at $5.70 a kg.

• Advance payment for 2015/16 set at $3.66 a kg.