Milk price forecast 20c cut 'difficult pill'

A further 20-cent cut in Fonterra's milk price forecast has been described as a ''difficult pill for farmers to swallow'', stripping about $370 million from farm incomes this season.

While the reduction was not unexpected, the timing came as a surprise as the next milk price update was not due until this month.

The reduction from $4.70 to $4.50 amounted to a forecast cash payout of $4.70-$4.80 for the 2014-15 season when combined with the estimated dividend range of 20c-30c per share.

Fonterra cited recent large dairy price falls and continued oversupply in dairy markets for its decision.

While it had confidence in the long-term fundamentals of international dairy demand, the market had not yet rebalanced.

GlobalDairyTrade (GDT) auction prices for products that informed its farm-gate milk price had fallen 23% since February, chairman John Wilson said.

The reduction would affect cash flows for farmers, who needed to continue exercising caution with on-farm budgets, he said.

''Our farmers are already managing very tight cash flows. Although this reduction is not the news that anyone wants, it is important we keep our farmers updated, given the significant market uncertainty,'' Mr Wilson said.

Fonterra was also lowering the advance rate of scheduled monthly payments to farmers, given the reduced forecast.

Chief financial officer Lukas Paravicini said the co-operative was ''very bullish'' about the longer-term outlook for dairy prices.

''Clearly, the fundamentals are very positive in terms of long-term protein needs and supply, and not just for China but also India, Africa, Southeast Asia.''

While he expected an improvement, Mr Paravicini acknowledged farmers would face continuing difficulty in the short term.

Fonterra Shareholders Council chairman Ian Brown said that while recent GDT results had signalled the possibility of a further drop in the forecast, it was ''still a difficult pill for farmers to swallow''.

''It demonstrates that, as with other industries in New Zealand, Fonterra and its farmers are subject to the volatility of the global economy,'' Mr Brown said.

ASB yesterday dropped its forecast by 10c to $4.50 and rural economist Nathan Penny said the focus now shifted to next season.

The bank's 2015-16 milk price forecast stood at $6.20 but risks continued to rise on the down side.

While global production growth was slowing, supply was still high, relative to demand, and it also appeared the Chinese economy was weaker than previously thought, Mr Penny said.

Fonterra's latest estimate of New Zealand milk production for the current season was 1.607 billion kilograms of milk solids, which was 1.5% above last season, and the revision represented a 3.5 percentage point jump from its previous forecast of a 2% decline from last season.

Earlier this week, Westland Milk Products revised its predicted payout for the 2014-15 season from $5-$5.40 to $4.90-$5.10kg ms before retentions.

Chief executive Rod Quin said a $5.20 payout seemed possible before the recent auctions, as buyers looked to New Zealand to secure supply ahead of the dry conditions in January and February, but customer sentiment had changed ''significantly''.

The high value of the New Zealand dollar also continued to play a part in the ability of New Zealand to get good returns for its farmers in international markets, Mr Quin said.

He expected the next three months to be ''very tough'' as European processors aggressively sold their peak milk.

Current prices were unsustainable in terms of farm economics and that could help turn the market around through a reduction in production, he said.

New Zealand First leader Winston Peters said the party was putting finishing touches on an amendment to the Receiverships Act that would introduce agricultural debt mediation.

The need for that Bill might ''become all too obvious'' over coming months, Mr Peters said.

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