Fonterra's revised $4.55 payout for milk solids for 2009-10 - a downgrade announced in May, which wiped almost $800 million income from the economy - is again under "serious risk" following Fonterra's latest "spot market" milkpowder auction, Westpac senior economist Doug Steel says.
Although Westpac is maintaining its forecast of $4.70 for a kg of milk solids for the 2009-10 season, Mr Steel said yesterday if the current conditions persisted, with the New Zealand dollar around US65c, then "Fonterra will find $4.55 under serious risk and that may have to be revised [down]".
Fonterra's online milkpowder auction this week saw milkpowder prices per tonne down, for different delivery dates, between 3% and 8% to $US1829 and $US1841.
However, prices are down 58% on the same period last year, at almost five-year lows.
As recession-led global demand waxes and wanes for many commodities, the record milk solid payout in New Zealand of $7.90 kg in 2007-08 has steadily declined to the $4.55 announced in late May.
In spite of raising the concerns, Mr Steel anticipated the kiwi would trade back to below US60c and milkpowder prices would remain around $US1800, or improve.
There was a "ray of hope" in that spot prices, for milkpowder delivery in January-March 2010, had risen almost 2%, which would assist Fonterra in maintaining the $4.55 payout, Mr Steel said.
ABN Amro Craigs broker Peter McIntyre said normally, with the kiwi appreciating in value, commodity prices would rise.
Both Mr Steel and Mr McIntyre noted milk prices were tied to global oil prices, in that Middle Eastern oil-producing countries made up about 25% of Fonterra's customers, and when oil prices were up, those countries increased their demand for dairy products.
Oil is softening below $US70 per barrel.
Mr McIntyre said other issues were affecting the milk price, including farming protectionism and subsidies, a reduction in US herd numbers and imbalances in supply and demand.
Fonterra says customer demand for its whole milkpowder has picked up, but buyers on its regular internet auctions are being cautious.
The big dairy co-operative said that its July auction saw continued "market caution" around pricing.
"We saw increased customer demand, but they remain wary about paying too much in an uncertain environment," said Kelvin Wickham, managing director of Fonterra's global trade arm.
Buyers were taking a conservative approach "as they try to second guess when the inevitable increase in demand - and consequently prices - will occur," Mr Wickham said in a statement.
Mr Wickham said the global dairy market was still in a re-balancing phase.
"On the one hand, milk supply globally is declining sharply, but, on the other hand, recessionary conditions mean consumers have reduced their purchases of dairy products.
"Right now, our customers are attempting to predict exactly when decreasing supply or increasing consumer demand will result in an inevitable firming of prices."
Blue Read, chairman of Fonterra's shareholders' council, told Radio New Zealand there were "a fair number" of the co-operative's 10,500 farmers exposed to losses at the $4.55 payout level.
If the forecast payout fell further, "I don't think there's much insulation left".
The next Fonterra auction will be held on August 3.
