New Zealand co-operative group Fonterra’s dairy prices plummet

Fonterra Co-operative Group, the world's biggest dairy exporter, cut the amount it will pay New Zealand farmers for milk to the lowest in at least 10 years as weak demand and oversupply depress global prices.

Fonterra will pay farmers NZ$3.85 (€2.32) per kilogram of milk solids in the season ending May 31st, 2016, it said yesterday. The payout is the lowest since at least 2006 and 27 per cent less than Fonterra’s May 28th prediction of NZ$5.25 a kilogram.

Dairy prices slumped to a 12-year low at this week’s GlobalDairyTrade auction amid a global glut, threatening to curb economic growth in a nation that relies on dairy for a quarter of its export earnings.

"Today's announcement implies NZ$3.3 billion less revenue than normal for Fonterra's suppliers," said Michael Gordon, senior economist at Westpac Banking in Auckland.

"Prices are unsustainably low and we are seeing them beginning to impact production levels globally," chairman John Wilson said in the statement.

“Prices will recover over the course of the season. However, it will be a tough season for our farmers.”

Constraints on demand from larger dairy buyers due to the economic slowdown in China and an import ban in Russia are weighing on prices. At the same time milk supply continues to increase in Europe and the US.

Fonterra expects milk collection from its New Zealand suppliers will fall 2 per cent in the 2015-2016 season as farmers curb costs by reducing stocking rates and supplementary feeding. It has reviewed its spending plans for the next two years, chief executive Theo Spierings said. "We are now targeting a spend of NZ$500 million to NZ$600 million less for 2016 financial year compared to financial year 2015," he said.

Fonterra said 2015-16 earnings per share would be 40 to 50 cents. It will also make an extra 50 cents a share available to farmers who want it this season.

– (Bloomberg)