Analysts slashed forecast payouts after milk prices fell for the eighth time in a row at Fonterra’s auction on Wednesday night.
The GlobalDairyTrade index dropped another 5.9 per cent, and is currently the weakest it has been since August 2009.
The average sale price was US$2276 (NZ$3373) a tonne, down from US$2409 at the previous fortnightly auction.
The crucial export category of whole milk powder took the hardest fall, down 10.8 per cent.
Federated Farmers’ dairy industry group vice-chairman Chris Lewis said he had expected prices to bottom out two months ago.
«Now we’re just in uncharted territory. It’s beyond words.»
With most farmers having dried off their herds in May, Lewis said cashflow would be negative until at least October.
«Farmers are definitely worried, that’d be an understatement.»
He said the income squeeze would also have an effect on the broader economy, with farmers tightening the purse strings on spending in rural towns and cities.
ASB cut its forecast farmgate return from $5.70 per kilogram of milk solids to $5.
That compares to Fonterra’s guidance of $5.25, although both figures are well below the average $5.40 to $6 needed to break even.
ASB’s rural economist Nathan Penny said cashflow would remain tight through the first half of next year.
«It’s going to be a tough year for our clients. Our rural team will have to work very closely with them, and are already doing so,» he said.
Dairy analysis firm AgriHQ cut its forecast from $5.50 to $5.05.
Analyst Susan Kilsby said the last time milk powder prices were so low was six years ago, when demand was limited due to the global financial crisis.
She said it would be difficult for prices to recover significantly in coming months, because the quantity of powder available would rise with New Zealand’s seasonal increase in production.
One silver lining was that the lower New Zealand dollar partially offset the pain of the decline, Kilsby said.
The Reserve Bank lowered the official cash rate by 0.25 per cent last month, and major bank economists expect it to make more cuts before the year is out.
That has put substantial pressure on the New Zealand dollar, which is now at five-year lows against the greenback.
The dollar dropped another half a cent following the auction, and was trading at US67.47c on Thursday morning.
Lewis said the falling exchange rate and interest rate cuts had helped soften the blow somewhat.
«To have any real effect, the way things are looking, we’d be hoping the Reserve Bank might price in two more cuts before Christmas,» he said.
«A 0.75 per cent drop in one year would have a noticeable effect.»
ASB economists have gone one further, with the fall in dairy prices pushing them to pick three consecutive cuts between now and October.
The auction also saw butter milk powder prices fall 8.1 per cent, skim milk powder 5.8 per cent, cheddar 4.9 per cent, rennet casein 4.1 per cent, and butter 0.3 per cent.
Anhydrous milk fat was the only category to show improvement, up 1.6 per cent.
* An earlier version of this story was published with a photo of a beef cow. The error is regretted and has been corrected.
Source: Stuff
