NZ dairy outlook still sound, says Rabobank

Rabobank says that the dairy payout cut will mean trading losses for many - but most had entered the current downturn in good shape after a big season last year.

New Zealand dairy farmers will face significant challenges in the coming 12 to 18 months but the medium to longer-term outlook for the sector remains sound, rural lending specialist Rabobank said.

Rabobank New Zealand chief executive Ben Russell said while the challenges New Zealand dairy farmers would have to deal with in the immediate term were "acute", the bank expects a price recovery to commence during the 2015-16 season.

He said Wednesday's announcement by Fonterra that it would cut its farmgate milk price forecast to $4.70 a kg from $5.30 a kg reflected the "unfortunate reality" of subdued demand and over-supply of milk in global markets.

"It also demonstrates the inherently volatile nature of global agricultural commodity markets and the sharp swings in income that farmers face on an annual basis," he said.

Rabobank director of Dairy Research New Zealand and Asia, Hayley Moynihan said economic indicators were beginning to emerge that would lead to reduced global dairy supply.

"Importantly, milk prices are now falling in key production markets around the world, which will in time produce a supply response and lower export supply growth," she said.

"European prices continue to ease and US prices are expected to join the trend over coming weeks and months after holding up for an extended period."

However, Moynihan cautioned that low global feed grain prices would delay the magnitude of the supply response, particularly in the US, resulting in plentiful global export supply through at least the first half of 2015.

Russell said while a milk price of $4.70/kg would result in trading losses for a significant proportion of New Zealand dairy farmers, most had entered the current downturn in strong shape after a good season in 2013-14.

"Many dairy farmers have strengthened both their balance sheets and the efficiency of their operations in recent years, and particularly since 2008," he said.

Russell said the bank was confident that most of its clients had the resilience to handle the plunge in dairy prices.