New Zealand dairy exporter Fonterra slashed its milk purchase price to a six-year low on Wednesday due to an ongoing fall in global dairy prices, dealing a blow to farmers and the economy of the world’s largest dairy exporting nation.
The co-operative cut the price it pays its farmer shareholders for raw milk to NZ$5.30 (HK$33.30) per kg of milk solids from a previous forecast of NZ$6, as expected by many economists. The forecast was the lowest since the 2008/09 season.
Pent-up milk powder inventories in China, where demand has soared, and a rise in global supply have knocked world prices from last year’s record highs, and the co-operative said it expected prices to remain volatile in the coming months.
“The forecast reflects an uncertain outlook for the global economic environment and an expectation of continued volatility for dairy prices driven by geopolitical events and the supply-demand imbalance,” Fonterra chief executive Theo Spierings said in a statement.
The downgraded forecast from NZ$6 reflects a 44 per cent tumble in global dairy prices so far this year and represents a sharp fall from a record-high payout of about NZ$8.40 for the year ended July.
It will result in a NZ$5.4 billion blow to farmers’ incomes from the previous season and roughly a 2 per cent impact on nominal growth in the US$180 billion economy.
Economists saw the possibility that the payout forecast could be cut further during the year as a Russian ban on dairy imports in the face of tensions in Ukraine has resulted in a flood of global supply that could pressure global prices.
“Dairy prices haven’t really settled after the Russian import ban in the last month or so, so there’s still some downside risk,” ASB dairy economist Nathan Penny said.
Economists say a significant payout cut from last year will likely force farmers to reduce capital expenditure while highly indebted operators might struggle to repay debts as interest rates rise.
Fonterra also announced a 76 per cent tumble in net profit to NZ$179 million for the year ended July, while normalised earnings before interest and taxes fell 50 per cent to NZ$503 million, in line with the company’s downgraded forecast.
Margins took a big hit from high input costs last year, while the company struggled to churn out profitable products during a strong production season.
But the company said it expected margins from its consumer and food service businesses to pick up from the second quarter, as it pays less for raw milk while it improves its product stream to process higher-returning products.
Source: SCMP