Westland Milk cuts dairy payout forecast

Dairy farmers were given a taste of things to come when Hokitika-based Westland Milk Products said it would cut its forecast payout for 2014/15 by 40c a kg of milksolids to a range of $5.00 to $5.40 a kg.

Westland, New Zealand's second biggest dairy cooperative after Fonterra, said advance payments to farmer-shareholders would also be adjusted to reflect the lower dairy prices.

"This will be unwelcome news for shareholders, but not unexpected," chairman Matt O'Regan in a statement.

Westland, at shareholder meetings held in October, warned suppliers that the high level of in-market stocks held its customers was producing downward pressure on prices, especially in the area of bulk milk powders, where the majority of its business lies.

The Westland board has yet to decide on the level of retention - money held back for development of the cooperative. Last year retentions came to 30c a kg.

ASB Bank rural economist Nathan Penny said Westland's downward revision came as no surprise given the slump in prices on the GlobalDairyTrade auction platform.

"We expect to see more of the same magnitude by Fonterra, post the December 9 board meeting," Penny said. "It's a reflection of prices struggling to find their feet," he said.

Skim milk forms a big part of Westland's sales and it is a product that has suffered heavily from the Russian ban on some Western food products in a tit-for-tat trade sanctions with the west over its support for anti-government forces in the Ukraine.

Russia is a big consumer of cheese from western Europe and the ban means milk that had previously gone into cheese production was now going into skim milk powder, which has a long shelf life and which attracts subsidy support.

The resulting higher-than-normal skim milk powder production has acted to depress prices, as has a surge in milk production in New Zealand and in many other parts of the milk producing world.

Bank economists expect Fonterra to cut its farmgate milk price to below $5.00 from its current forecast of $5.30 when it revises its forecast next month.

Bank and industry commentators have widely predicted continued downward pressure on payouts throughout the industry after a near 50 per cent in international dairy product prices since February.

O'Regan said that the inventory position for many of New Zealand's dairy customers was a reflection of some overstocking earlier in the year following supply concerns due to drought, food safety and regulatory changes.

He said customers were "generally comfortable" with their inventory positions into the first quarter 2015, "so we do not expect a sudden uplift in demand".

"The lesson from this is that Westland's drive to produce more value added products - such as our move into base infant formula powders and our recent announcement of an investment in a UHT milk plant - is the right direction to take so we are less reliant on the highly volatile commodity markets in future," he said.

O'Regan said the pay-out would "undoubtedly" be a challenge for many farmers and budgets would be tight. The company had systems and processes in place support shareholders who might struggle financially, he said.

By Jamie Gray, NZME. News Service business reporter

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