Hokitika-based Westland Milk Products, New Zealand's second biggest dairy co-operative after Fonterra, said it had cut its milk payout prodiction for the 2015/16 season because of a 15 to 25 per cent fall in prices across all its commodity products.

Chairman Matt O'Regan said the new predicted payout of $4.15 - $4.45 per kg milk solids from a previous forecast of $4.90 to $5.30 per kg would be "grim news" for Westland's shareholders but not unexpected.

He said lower prices were expected to remain for this season and probably into the second half of 2016 - the beginning of the 2016-7 season.

"As farmers this is extremely unwelcome news," O'Regan said in a statement. "It reflects Westland's view of what the market will deliver and we need to signal this to our shareholders so they can plan accordingly."


Westland's decision follows soft prices at last week's GlobalDairyTrade (GDT) auction, where GDT price index eased 1.4 per cent following on from a 1.6 per cent decline at the first sale of the year.

Fonterra's $4.60 per kg farmgate milk price forecast is expected to come under more downward pressure if prices fall again at next week's auction.

OpenCountry Dairy, New Zealand's second largest dairy processor after Fonterra, has already reduced its milk payout by 30c to an average price of between $4.00-$4.30 per kg milk solids. Fonterra is bound by legislation to review its forecast by March, although it may opt to look at it sooner.

Rural economists expect Fonterra to cut its forecast to the low $4 mark.

O'Regan said it was "definitely not a happy New Year" as far as dairy markets are concerned.

"Major volatility from around the globe has share markets on edge with concerns about China's short-term slow down perceived as a key risk to global fortunes, despite that country's 6.8 per cent growth figure."

The major global driver of downward prices, however, is the ongoing growth of milk supply in Europe and the United States, O'Regan said.

"Demand from China is steady, but well down on two seasons ago. Sanctions against Russia remain in place and limit large volumes of European dairy products entering this key consumption market.

Dairy farmers in Europe are receiving above market prices for milk - due to processors over paying for milk as farmers adapt to the removal of quotas and find a new sustainable farm gate price - which has kept their production higher than expected.

"Our customers are still buying, but have multiple sources and therefore the luxury of choosing from some reasonably aggressive offers as processors look to avoid a build-up of stock," he said.

However, O'Regan said the recent lifting of sanctions against Iran was good for Westland, which has butter contracts in that market.

Westland remained confident that it can grow its sales in China, where the slow-down in the Chinese economy has had little impact on demand for quality food products at the high end of the market.

"With our ability to produce a higher proportion of added-value of nutritional products coming on stream, and our UHT milk plant almost ready to go, there remain good prospects for sales into China with products that return better profits back to shareholders," he said.