Westland slashes predicted payout

Westland Milk Products has slashed its predicted payout from $4.90-$5.30 to $4.15-$4.45 for the 2015-16 season.

A forecast 15%-25% reduction across all commodity products for the remainder of the season was the driving force behind the decision, chairman Matt O'Regan said.

While the revised forecast was grim news for Westland's shareholders, it was not unexpected given the widely publicised state of the global dairy market. Fonterra was also expected to cut its $4.60 milk price forecast at its next review.

Lower prices were expected to remain for this season and probably into the second half of 2016, the beginning of the 2016-17 season.

It was ‘‘definitely not a happy New Year'' as far as dairy markets were concerned, Mr O'Regan said.

‘‘Demand from China is steady but well down on two seasons ago.

Sanctions against Russia remain in place and limit large volumes of European dairy products entering this key consumption market.

‘‘Dairy farmers in Europe are receiving above market prices for milk - due to processors overpaying for milk as farmers adapt to the removal of quotas and find a new sustainable farm gate price - which has kept their production higher than expected.

‘‘Our customers are still buying, but have multiple sources and therefore the luxury of choosing from some reasonably aggressive offers as processors look to avoid a build-up of stock,'' he said.

The recent lifting of sanctions against Iran was good for Westland, which had butter contracts into that market.

The company also remained confident it could grow its sales in China.

In ASB's latest Farmshed Economics report, rural economist Nathan Penny said Chinese economic concerns were spilling over into dairy markets, making the dairy price recovery slow and stop-start.

The Chinese economy was ‘‘in a sticky patch'' with GDP growth ending 2015 at its lowest pace in 25 years.

With China the largest dairy importer, dairy markets soon reflected any Chinese weakness.

If Chinese growth concerns receded, dairy price strength was expected to return soon, Mr Penny said.

In the bank's latest Commodities Weekly, Prof William Bailey, from the department of agriculture at Western Illinois University, said low dairy prices in the EU would eventually have a production consequence.

Recent data showed German dairy producers' cost of production was well above their returns on milk sold.

The figures, from October last year, reflected a continuing economic reality for German producers.

Those numbers showed only 65% of the cost to produce milk was covered by revenue from milk sales.

In view of the cost-revenue gap, it would take time for the industry to cut back on production or for demand to grow and increase prices.

Add a Comment