Fonterra cautioned dairy farmers over a drop in incomes as it
cut its forecast for milk prices less than two months into the new season, acknowledging
the high inventories held by Chinese buyers.
The New Zealand-based co-operative, the world's top dairy exporter,
cut by NZ$1.00 to NZ$6.00 per kilogramme of milk solids its forecast for its
payouts to farmers in 2014-15, which started last month.
The downgrade leaves producers on track for a 29% slump in prices
compared with last season's record payout, when they benefited from strong
volumes too, with Fonterra's collections rising by 8.3% to 1.58bn kilogrammes
of milk solids.
John Wilson, the Fonterra chairman, highlighted that the
forecast fall in milk prices "will have an impact on our farmers' cash flows".
He urged "caution over farm budgets in line of the
continuing volatility in international dairy markets".
In fact, dairy prices, as measured by Fonterra's
GlobalDairyTrade auctions, hit a 21-month low this month, down 16% already from
the start of 2014-15.
The decline has been blamed by many observers on reduced
demand in China, with the US Milk Producers Council speaking for many commentators
in saying that "Chinese buyers clearly got ahead of themselves when they
brought in such huge volumes of milk powder around the turn of the year.
"Chinese milk powder inventories are burdensome and the
world's most-watched dairy importer will likely need to go through a period of
lower purchases to correct its past exuberance," the council said.
However, Chinese milk powder imports, while last month
falling 24% from May, typically show a summer decline, and remained 93% above
levels in June 2013, and the US Department of Agriculture, for instance, has
highlighted production increases in declining dairy prices.
Fonterra, which last month reassured over Chinese dairy
demand, on Tuesday acknowledged a "build-up of inventory" in the top dairy
However, Mr Wilson also highlighted "strong production
globally", and "falling demand in some [unspecified] emerging markets in
response to high dairy commodity prices".
In New Zealand itself, the season started off with a 10.1%
rise in Fonterra milk collections, although volumes are a fraction at this time
of year of those at the October seasonal peak.
"In addition the New Zealand dollar has remained strong,"
undermining the competitiveness of the country's exports, Mr Wilson said.
'Could have been
At broker TD Securities, analyst Annette Beacher said that
the drop in Fonterra's forecast could have been worse, if the full drop in
dairy values had been passed through.
"Dairy prices have collapsed by 30% year to date, and taking
the historical correlation literally between dairy prices and Fonterra payouts,
the farmgate price 'could' have been closer to NZ$5 per kilogramme of milk
solids," Ms Beacher said.
However, there was the potential for further reductions.
"The history of downgrades to date suggests that Fonterra
prefers to adjust payouts in smaller increments, so we cannot rule out another
downgrade in the coming months," potentially on September 24 when the
co-operative unveils annual results.
Fonterra said that its price forecast "anticipates some
recovery" in milk prices, but added that it was "too early to predict how
strong this recovery will be, or when it will kick in".