Supermarket milk price drop could be coming, says Countdown

Lower prices at the farm gate take some time to filter through to supermarket shelves.

A drop in the price of milk on supermarket shelves could be in store for New Zealanders - but not anytime soon, says supermarket giant, Countdown.

Countdown spokesperson, James Walker, said prices could drop if reductions in farmgate milk prices are announced today. Due to a lag time however, milk in supermarkets would not become cheaper for some months.

"The main driver of milk prices is the cost that we buy fresh milk from the processors who buy it from Fonterra," he said. "If we receive price decreases from our suppliers, we will pass further price decreases onto the customer.

"Wholesale milk prices are unlikely to change or come through to the milk processors until October," he said.

His comments come in the lead up to an expected announcement of sharp reductions in farmgate milk price for 2015/16 from Fonterra. Analysts expect the forecast, which currently sits at $5.25 a kg of milksolids, to be cut by at least $1 a kg, with some predicting it will fall as low as $3.30 a kg.

The price of milk has already dropped in recent months. According to the Consumer Price Index, reported by Statistics New Zealand, the average price for two litres of blue-top milk has fallen 9.4 per cent from its peak in November 2014. Meanwhile the price of fresh milk is the lowest it's been since August 2013.

While the reductions in farmgate milk prices may benefit shoppers, farmers will be taking a big hit to the pocket. Farmers face a potential loss of $2 billion in incomes.

The Fonterra announcement will be made at 3pm this afternoon.

Fonterra is expected to announce a sharp reduction in its farmgate milk price for 2015/6 today, potentially shaving billions off farmers' total income for the year and putting more downward pressure on an already cooling economy.

Analysts expect the forecast, which currently sits at $5.25 a kg of milksolids, to be cut by at least $1.00 a kg, with some predictions going as low as $3.30/kg.

Agriculture information provider, AgriHQ, estimates that a $1/kg drop in the milk price equates to about $2 billion less income for dairy farmers.

What's being announced today?
The farmgate milk price forecast for the year - that's the price Fonterra pays its 11,500 farmers for their milk.

What will the price be today?
Experts say it could fall as low as $3.50 per kg of milk solids, this would be down from the previously forecast price of $5.25. It hit a high in 2013/14 of $8.40. These payments are made to farmers throughout the year.

How's this set?
Through the global price of milk powder determined by international supply and demand. During the past year prices have plummeted because of high production around the world and weak demand, especially in China.

How would a payout around $3.50 affect the economy?
The rule of thumb is that for every $1 decline in the milk price represents a $2 billion decline in farmer incomes.

How would this affect farmers?
A price around $5.70 is regarded as breakeven for many farmers. Those with high debt from converting other farms to dairy are more vulnerable but banks have said they are working closely with them to avoid problems.

What about dairy prices for New Zealand consumers?They could fall, but slowly.
Fonterra points out the latest CPI figures shows the average price for 2 litres of blue-top milk is down 9.4 per cent from its peak in November 2014. The price of fresh milk is the lowest it's been since August 2013.

If the farmgate milk price were to drop the company says it would expect to make some reduction in our wholesale prices. However, there will be a lag because it would not start buying milk at a lower farmgate price until October 1. In other countries there are milk price wars where supermarkets sharply discount, incurring a loss to attract customers.

What's the long term outlook?
It could take some time for the price to recover. Around the world all dairy farmers are suffering but internationally New Zealand remains a low cost producer of milk and is better placed to ride out the storm.