The world’s largest dairy exporter held its farmgate payout price at NZ$4.70 ($4) per kilogram of milk solids, its lowest since 2007 and surprising some analysts who were expecting a slight rise.
At nearly half of last year’s record payout of NZ$8.40, the forecast remains below the cost of production for many of Fonterra’s farmer shareholders, who collect nearly 90 percent of the country’s milk production and have seen their incomes slashed while production has suffered from drought.
Global dairy prices have risen 26 percent at Fonterra’s fortnightly auctions so far this year due to falling supply, following a 50 percent plunge in prices last year due to easing demand from major buyer China.
«We see demand coming back but it’s still very weak in China, our biggest market, and we see a lot of demand due to restricted supply than any significant demand,» Fonterra Chief Financial Officer Lukas Paravicini told Reuters.
New Zealand’s dairy production, which is pasture-based, has fallen in past months due to a dry summer, prompting the government to declare drought in the South Island, the country’s fastest growing dairying region.
Last month, Fonterra cut its annual collection forecast by 3.3 percent from last year’s record volumes, and Paravicini said he saw a significant risk in achieving the forecast if drought conditions continue.
Analysts expect global dairy prices to continue rising in the coming months as supply remains tight, although another dip in prices may be in store in the second half of the year as supply from Europe and North America hits the market.
While a lift in the farmgate price would raise farmer incomes, analysts warned that any improvement based on tighter supply would still be negative for the overall economy as dairy products account for roughly one-third of the country’s exports.
«Even though prices are starting to pick up … we’re not getting overly excited because it’s essentially the flip side of poor production in New Zealand and that is unequivocally negative for the country,» BNP economist Doug Steel said.
Easing growth in China has weighed on consumption and has slowed the aggressive pace of buying by Chinese processors seen in 2013 and early 2014.
Meanwhile, exports to other top markets including the United Arab Emirates, Malaysia, Indonesia, and Algeria, have jumped to record annual levels in 2014, according to official trade data. ($1 = 1.3261 New Zealand dollars) (Reporting by Naomi Tajitsu; editing byAndrew Roche)
Source: Reuters