But in its weekly commentary, the bank said last week’s developments in dairy had added to signs that momentum in the economy was dissipating and reinforced expectations a sharp slowdown in growth was on the cards over the coming year.
“First up, the outlook for earnings in the dairy sector has continued to deteriorate,” the report said.
“Global dairy prices fell another 9.3% in the latest GlobalDairyTrade auction, taking them to their lowest level in 13 years.
“And, as in the previous auction, many prices were limit-down, implying that the downward pressure on prices is likely to spill over into the next auction as well.”
Fonterra’s revised forecast of $3.85/kg would pull export earnings down by about $1.2 billion compared to the 2014-15 season – equivalent to about 0.5% of annual GDP.
“Looking ahead to the 2016-17 season, we expect some recovery in prices as global demand and supply conditions rebalance.
“However, at this stage we’re only assuming a payout of $5.20/kg, which would still be below the average of the past 10 years.
“Of course, there’s still a huge degree of uncertainty around how dairy prices will perform over the current season and that goes doubly so for next season.
“But whatever the outcome, many in the farming sector are going to be facing some tough conditions over the next couple of years.
“And, importantly, the resulting reductions in earnings, spending and employment will have a dampening impact on the economy more generally.”
