Bad news for dairy farmers continues with another drop in global dairy prices, leading banks to further trim milk price forecasts.
Prices fell 1.4% in this week's GlobalDairyTrade auction, as expected, with whole milk powder down 0.5%, butter down 5.9% and skim milk powder down 3.2%.
Following the result, ASB trimmed its milk price forecast by 50c to $4.10 and Westpac cut its forecast to $4.20, while Fonterra was widely expected to cut its current $4.60 forecast at its next review.
Federated Farmers dairy chairman Andrew Hoggard urged farmers to have faith in the GDT model, saying it was not about the system, it was ‘‘economics 101''.
‘‘Supply is too high and demand is weak, which is keeping prices down. If Kiwi farmers want to lay the blame somewhere, they should look offshore to the subsidised production that still exists in too many other countries,'' Mr Hoggard said.
Kiwi farmers needed that addressed and for more trade deals to open up new markets. Agreements such as the Trans Pacific Partnership had the potential to make a big difference over time, but would not ease the short-term pain farmers were feeling, he said.
The farm-gate milk price was ‘‘certainly looking much worse'' with Open Country Dairy already dropping its forecast and the GDT result increasing the likelihood Fonterra would do the same.
‘‘It is still possible that a sudden upswing in prices could get us there, but we'd need to see some very large increases in the next couple of months to reach the $4.60 mark. Even that is a fairly poor payout for most farmers, and falling below that is just going to ramp up the pressure on the dairy industry and those that support it,'' Mr Hoggard said.
ASB rural economist Nathan Penny said the bank's view remained that dairy prices would move higher over 2016. Global dairy production and exports were tightening, particularly out of New Zealand.
But, with time running out for this season, it effectively deferred much of the farm-gate benefits of price recovery to next season.
The latest auction result reinforced ASB's Official Cash Rate view, with the expectation of two further cuts in June and August taking it down to 2%.
The small decline followed Chinese growth and sharemarket concerns. Chinese GDP growth ended 2015 at its lowest in 25 years.
In addition, the Chinese sharemarket was, at one stage this month, 15% lower than at the end of 2015. Those concerns were spilling over into dairy markets, keeping prices subdued, Mr Penny said.
Westpac senior economist Anne Boniface said there were clearly risks on both sides of a $4.20 forecast.
European milk production continued to grow strongly and, if concerns about global growth and financial market volatility intensified further, prices could fall.
Balancing that risk, prices were already at very low levels and, globally, food prices had held up relatively well in the current round of financial market turmoil.
Looking further ahead, the bank believed that strong growth in global milk supply, combined with subdued demand from China, was likely to keep a lid on prices for much of this year. Westpac was forecasting a farm gate milk price of $5.20 next season.
Labour finance spokesman Grant Robertson said a Fonterra payout of below $4.50 - well down on farmers' break-even point - would have a major flow-on effect for already struggling rural communities.
