Economists trim expectations of milk price forecast after another big slump in global dairy prices

Fonterra's forecast of a milk price for farmers of $4.70 per kilogram of milk solids in the current season looks under serious threat after another big slump in global dairy prices overnight.

Farmers were "disappointed" last week when Fonterra trimmed its forecast dividend range by 5c after producing interim results it conceded were below farmers' expectations.

However, it retained its milk price forecast at $4.70 for the current season.

The latest fall in dairy prices has cast serious doubt though on whether that milk price forecast will be met, with economists paring back expectations today.

And Labour's economic development spokesperson David Clark said the latest price slump meant the country was "beginning to see the problems of a one-dimensional economy", with the price slump creating an "economic black hole of more than $6 billion".

ANZ senior economist Sharon Zollner described the result of the latest global dairy auction as "another dairy shocker" and said it "suggests a payout of $4.50-4.70 this year".

The AgriHQ Seasonal Farmgate Milk Price for the 2014-15 season has decreased by 10c per kg milksolids to $4.54 per kg milksolids following the latest GlobalDairyTrade (GDT) auction.

And ASB rural economist Nathan Penny has dropped his milk price forecast for this season by 10c to $4.60, while also revising his price forecast for 2015-16 down by 30c to $6.20.

ANZ's Zollner said the largest price falls in the latest auction were generally seen in the longer-dated contracts, up to 6 months out – into the new season.

"While these prices remain higher than those for the end of this season, the curve has flattened, suggesting less price recovery is now anticipated – not boding well for next year’s payout."

She said the NZ dollar response was negligible for two reasons: firstly, the weakness was clearly signalled by NZD dairy futures prices following Fonterra’s announcement of higher volumes, and second, US data disappointed overnight.

"But it is certainly clear that if New Zealand’s main commodity price is on its way south, something’s gotta give."

ASB's Penny said the latest dairy price corrections followed the swing in the NZ production outlook - as markets initially feared the worse following the NZ drought declaration.

"Fonterra was particularly pessimistic early in the year when it signalled a forecast drop in its production for the season of 3.3%. In line with this view, Fonterra lowered its forecast auction supply volumes.

"However, after dropping its forecast annual supply for the first three auctions of the year, Fonterra effectively reversed the changes by increasing the forecasts in the following three as rain arrived and production fears eased.

"In contrast, we have held our nationwide (i.e. for all processors) production forecast steady at flat for the season, which equates to a circa 1% fall for Fonterra.

"And we did find it strange how Fonterra was so pessimistic so early in the season. From this perspective, we suspect that the early season pessimism contributed to the subsequent price volatility, particularly once markets realised that the production outlook was simply not that bad. Moreover, with WMP recording the largest falls, particularly relative to SMP, we can infer that the recent swinging prices are largely a NZ (production) story."

AgriHQ dairy analyst Susan Kilsby said dairy commodity prices were now considerably softer than in the middle of March.

In the international market, she said the removal of the European Milk Quotas was expected to increase the world’s supply of milk.

"Already some Europe companies are targeting Asian markets with dairy products that compete with those supplied from NZ. While the total increase in milk from Europe is not expected to be huge, the exact size of the increase is unknown and it is this uncertainty that is making market participants nervous.”

This is the full statement from Labour's Clark:

The biggest drop in global milk prices for four years is yet another blow to the dairy industry and the many neglected regions that rely on it, says Labour’s Economic Development Spokesperson David Clark.

“This 13 per cent drop in milk powder prices will create an economic black hole of more than $6 billion. The lion’s share of the pain will be felt in regions that National is neglecting.

“Many small communities are now almost solely reliant on dairy farming.

“The fall in dairy prices shows National’s failure to diversify is hurting the economy, both locally and nationally.
“Instead of growing other sectors, Steven Joyce and Bill English are even more obsessed than ever with their milky way.

“That’s not fair on rural communities. It’s not their fault the economy relies so heavily on them. Farmers shouldn’t be the only ones shouldering the burden when it comes to New Zealand’s economic fortunes. They have more than enough on their plate already and are getting sick of it.

“The Government has failed farmers and the wider economy by not encouraging other sectors to grow and contribute to economic growth. Despite promising to rebalance the economy they haven’t even got out of the starting blocks.

“New Zealand needs a modern, diverse economy that creates well-paying jobs across all industries. We are beginning to see the problems of a one-dimensional economy,” David Clark says.