The New Zealand-based co-operative cut by NZ$0.60 per kilogramme of milk solids to $4.70 per kilogramme of milk solids its forecast for the milk price its farmers will receive in 2014-15 – the lowest since the ZN$4.46 paid in 2006-07.
The cut reflected what John Wilson, the Fonterra chairman, termed the «considerable volatility in global dairy markets», reflecting broader concerns, besides the retreat by Chinese importers, the world’s biggest for many dairy products, to relying on stocks built up last season.
«Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand,» Mr Wilson said.
Supply vs demand
Indeed, he said that «right now we are seeing a number of factors that are delaying a sustained return to higher global prices».
World supply «remains strong», Fonterra said, with output in Australia and the European Union rising by 5% in 2014, adding a combined 6bn litres to world milk supplies, with US growth of 2% adding a further 1.2bn litres, and New Zealand’s output up 3.9% so far this season.
Meanwhile, many key dairy import regions face «challenging» situations, with extremist factions unsettling parts of the Middle East, and weakening currencies testing South East Asian demand.
Russia faces not only the impact of its import ban on Western agricultural products, but also the knock-on effects of low crude prices, which could also affect oil exporting – but dairy importing – nations such as Algeria and Venezuela.
Delayed recovery
Fonterra delayed from about March 2015 to July 2015 the date at which it expects whole milk powder prices to rebound to $3,500 a tonne, from current levels of less than $2,400 a tonne.
Prices at the benchmark GlobalDairyTrade auctions that it operates did suggest higher prices ahead.
And the group stuck by ideas of supportive fundamentals in China, restating a forecast made last month of consumption rising by 4% in the country between 2012-20, ahead of production growth expected at 3%.
Nonetheless, «given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses,» Mr Wilson said.
‘Difficulty meeting interest payments’
Indeed, industry group DairyNZ warned that, on its analysis, «around a quarter of [New Zealand] dairy farmers are facing some business risk this season at the NZ$4.70 milk price.
«That means they will have difficulty meeting their interest payments, rent and farm working expenses without incurring more debt,» although the impact may only become evident next season.
«We think the 2015-16 season is when things will crunch financially for many people.»
The group cautioned against banking on an imminent revival in farmgate milk payouts, movements in which tend to lag those in the dairy commodity markets.
«We don’t expect milk prices to recover in the first half of 2015. So the start of the season next year in June will be when things could get really tough for farmers.»
Source: Agrimoney