The price for whole milk powder, New Zealand’s key commodity export, dropped 13% to US$1,848 a tonne in the GlobalDairyTrade auction overnight. Continued weakness in dairy prices was being driven by increased supply from NZ, Australia, Europe and the US amid lacklustre demand in China and an import ban in Russia.
“If you thought dairy prices were ugly before, they are horrendous now,” said Bank of NZ economist Doug Steel.
“We estimate aggregate prices are at their lowest level since 2002. This for NZ’s biggest export product that accounted for nearly a third of goods exports last year and nearly a quarter of all exports. It will hit NZ’s economic growth, lower the terms of trade further and widen the current account deficit.
“The very poor details in today’s auction sees us lower our milk price forecast further to $4.30. A lower NZD is helping at the margin, but the degree of decline in international prices continues to swamp the currency effect on milk price.”
Steel said $4.30/kg milksolids (MS)represented BNZ’s “best estimate of the middle of a very wide range of possible outcomes when the season’s figures are finalised in over 12 months’ time”, which was “well below the cost of production for many NZ dairy farmers and low prices for two seasons in a row will be a major challenge for all farmers.”
Most analysts have pulled back their forecast for Fonterra’s payout for the current 2015/16 season following the overnight auction, with expectations now in a range of $3.75/kg MS to $5/kg MS. DairyNZ estimated $5.70/kg MS was the industry average breakeven point for most farmers.
Auckland-based Fonterra had forecast a $5.25/kg MS payout for the current 2015/16 season, but that is based on prices heading back towards US$3,500 a tonne in the coming year. Fonterra’s next opportunity to review its milk price forecast is at its August 7 board meeting.
“We are constantly monitoring the global situation and continuing to look at all the factors that impact the milk price across the current season, which has just started,” Fonterra group director of co-operative affairs Miles Hurrell said.
“The global dairy market currently has a big imbalance between demand and supply.”
Weaker dairy prices are weighing on NZ’s economy, cited as a reason for decade-low rural confidence levels, deteriorating business confidence and are firmly on the radar of the Reserve Bank, which has begun cutting interest rates to bolster slowing growth.
“The prospect of two consecutive seasons of very low milk prices will have implications for the Reserve Bank,” said Westpac’s Michael Gordon.
“We suspect that fixed-term interest rates will fall further as markets move to price in more aggressive interest rate cuts from the Reserve Bank.”
Some economists were forecasting three further interest rate cuts this year, which would fully reverse the central bank’s tightening in policy last year when it raised interest rates by a percentage point. The central bank was next scheduled to review interest rates next Thursday.
The outcome put “heaps more pressure on the RBNZ to cut interest rates,” Steel said.
“It looks to us that dairy prices are around 16% below where the RBNZ had factored into their June MPS.”
The continuing fall in dairy prices meant farm debt levels were likely to rise, and rural communities were likely to suffer as farmer reduce spending to the bare essentials, AgriHQ dairy analyst Susan Kilsby said.
A survey published by Federated Farmers yesterday showed a net 62% of dairy farmers expected their profitability to deteriorate over the next 12 months, while a net 60% expected to reduce spending and a net 49% expected to increase debt.
