Dairy farmers face payout cut after big fall in global auction prices

A price drop for NZ farmers was expected after milk from Europe and the US bumped up world supply. Photo / Christine Cornege

New Zealand dairy farm payouts look likely to sink further next season if the downward trend in dairy prices continues, economists say.

Prices of dairy products had their biggest decline since July 2010 in Fonterra's latest GlobalDairyTrade auction, pushing the price index below its 10-year average.

The GDT-TWI Price Index fell 9.9 per cent compared with the last sale two weeks ago. The average winning price dropped to US$2983 ($3636) a metric tonne. Fonterra last month confirmed its forecast payout range for 2011/12 was $6.75 to $6.85 per kg of milk solids, down from last year's $8.25 per kg record.

ANZ chief economist Cameron Bagrie said going on Tuesday night's auction a cut in a payout for 2012/13 was on the cards. "Based on last night the payout will have a $5 in front of it, not a $6," Bagrie said.

He said the sector was unlikely to enjoy the productivity boost it has now, which has helped to offset price weakness, in the 2012/13 season.

Federated Farmers dairy chairman Willy Leferink said more milk coming out of the United States and Europe was increasing world supply.

"This month alone there has been a 10 per cent increase in volumes on the platform, so a price drop was not unexpected," he said.

"We will have to watch what happens over the next few months, but with Fonterra already having revised down it's payout by 45c to $6.30 per kg of milk solids [farmgate], New Zealand dairy farmers should begin preparing for a potentially lower milk price forecast for the 2012-13 season," he said.

Bagrie said the prognosis for the industry still looked sound, but he expected a more conservative attitude to "percolate" through the sector.

"I suspect that when demand starts to come back, and this increased supply boost starts to wane, that it will provide a floor for prices," he said.

"Hopefully, the New Zealand dollar will give up some of it recent gains as well, so there should a little bit of upside," he said.

The New Zealand dollar has remained stubbornly high, trading yesterday at US82.16c from US81.62 on Tuesday night.

Bagrie said there was a "disconnect" between prices and the Kiwi dollar, which had maintained its strength despite the drop in New Zealand's most important bellwether commodity.

BNZ agricultural economist Doug Steel said the drop auction price was "material". "It will have a meaningful impact on 2012/13, but by the same token, it's a long time between now and next October, which is when that season's payout will be finalised," he said. APNZ