Westland Milk, New Zealand's second biggest dairy co-operative after Fonterra, says it has cut its forecast payout for the current season to $4.90-$5.10 per kg of milk solids, which is below break-even for most farmers.
The revised forecast, which was before retentions, compared with a previous forecast of $5 to $5.40 a kg. Dairy NZ's estimate of an average break-even point is $5.40 a kg.
Westland Milk chief executive Rod Quin said a $5.20 payout seemed to be possible before recent GlobalDairyTrade (GDT) auctions, as buyers looked to New Zealand to secure supply ahead of dry conditions in January and February.
"However, customer sentiment has now changed significantly."
Skim milk powder out of Europe is being offered at US$2100 to US$2200 a tonne - well below offers from New Zealand of US$2600 to US$2800 a tonne and GDT prices of US$2300 to US$2400 a tonne.
Current prices were unsustainable and this by itself could help turn the market around through a reduction in production, but a high New Zealand dollar was making matters worse, Quin said.
"The New Zealand dollar remains strong at US76c-US77c, reflecting our official cash rate of 3.5 per cent, our very low inflation, and relatively stable political environment."
Westland Milk was well-placed thanks to sales decisions made earlier in the season, but Quin said the co-operative would still have some exposure to the marketplace and the impact of lower prices for the remainder of the season.
"I expect the next three months to be very tough, with European processors aggressively selling their peak milk," Quin said. "Not all European markets are producing more milk than last year, but enough are to drive an oversupplied situation."
Milk supply in Europe and the United States is expected to slow, as it has in New Zealand.
Westland's milk flows are now tracking down and Quin said he did not expect them to recover, given the lower payout forecast for this season.
Low commodity prices showed the importance of having a range of product options, with more of Westland's range in value-added sales.
The value in the co-operative's infant nutrition business was significantly higher than that received for its more traditional bulk milk power products.
The company's new nutritionals dryer at Hokitika, due to come online in the 2015/16 season, was expected to increase Westland Milk's returns compared with milk powders.
Westland has also started construction of its new UHT plant at its Rolleston site, which is aimed at the high end of the lucrative and expanding UHT milk market in China.
Meanwhile AgriHQ has revised its 2015/16 forecast farmgate milk price for Fonterra down to $5.70 a kg of milksolids from $6.50, based on NZX dairy futures prices for the first six months of the season.
Dairy analyst Susan Kilsby, writing in the latest edition of AgriHQ's Farmgate Dairy report, said she expected prices to improve in the second half.
"During the latter half of the season we assume that whole milk powder prices will return to their long-run average price as global markets come back into equilibrium," Kilsby said.
At $5.70 a kg, the farmgate milk price would be only slightly above Dairy NZ's break-even point.
Fonterra's forecast for the current season, which ends on May 31, sits at $4.70 a kg, compared with AgriHQ's estimate of $4.51 a kg.