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Fonterra Milk Price Forecast Falls Short of Expectations

Published on May 26 2016 7:26 AM in Fresh Produce tagged: Featured Post / Dairy / New Zealand / Fonterra

Fonterra Milk Price Forecast Falls Short of Expectations

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, forecast a lower-than-expected milk payout for the coming season. The New Zealand dollar fell.

Auckland-based Fonterra Thursday forecast a farmgate milk price of NZ$4.25 ($2.87) a kilogram of milksolids for the season ending May 31, 2017, and maintained its estimate for the current season at NZ$3.90 a kilogram, a nine-year low. ASB Bank economists had predicted an opening Fonterra forecast for 2016-17 of NZ$4.80, while Bank of New Zealand expected NZ$4.60.

A global milk glut is depressing dairy incomes and curbing economic growth in New Zealand, bolstering the case for another interest-rate cut from the central bank. Governor Graeme Wheeler has already cut the benchmark rate to a record-low 2.25 percent and said another reduction is likely, though a booming housing market and strength in other parts of the economy, such as tourism, may stay his hand at the next decision June 9.

“Today’s announcement is a reminder that further cuts by the RBNZ should not be ruled out, although we remain comfortable calling no change in June,” said Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd. in Wellington. “Eventually, we continue to think the RBNZ will be drawn back to the table, but that’s down the track. For now, housing and the broader economic picture is hard to ignore.”

The kiwi dollar fell almost half a U.S. cent to as low as 67.27 cents after the Fonterra announcement, and traded at 67.31 cents at 9:40 a.m. in Wellington.

Fonterra said the “relatively high” exchange rate weighed on its milk forecast. The imbalance between supply and demand in global dairy markets should gradually correct over the coming season, it said.

“We are expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices, however we continue to urge caution with on-farm budgets,” Chairman John Wilson said in a statement.

Many dairy farmers are facing a third straight year of losses, after Fonterra’s payment dropped from a record NZ$8.40 a kilogram in the 2013-14 season. The cuts in farmgate prices haven’t been limited to New Zealand, with Australia announcing a loan and aid package on Wednesday to support farmers there.

Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland, said Fonterra’s initial estimate for the coming season was “much lower” than market consensus and “appears to be based off recent spot dairy prices with no future increases in global dairy prices built in.”

ASB expects an eventual milk price in the region of NZ$6 per kilogram for this season as the supply contraction and a lift in demand bring back price tension, he said.

News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.

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