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Australia milk price woes force 'negative impact' on listed dairy group

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Australian Dairy Farms warned of a "negative impact" into next year on its prospects from lower milk prices, even as dairy giant Fonterra joined processors cutting forecasts for Australian prices.

Australian Dairy Farms, in a letter to its shareholders, said that the acquisition in April of processor Camperdown Dairy Company offered support to the group's trading outlook with the business showing "rapid growth" in its order book.

However, "it is clear that the financial flow-on of materially lower raw milk prices… will have a negative impact on the group's 2016 financial year results, and also likely affect farm production revenue in 2017".

Shares in Australian Dairy Farms, which owns dairy farms in Victoria state, and is aiming to grow as a milk producer, closed down 2.8% at Aus$0.175 in Sydney, Aus$0.005 from matching their 2016 low.

'High alert'

The statement represents a series of cautions from Australian milk producers over the threat to the industry from milk production cuts being enacted by processors in the face of persistent weakness in world dairy commodity markets.

The Sydney Morning Herald said this week that Australian banks were "on high alert" over their exposure to borrowings by farmers, which face prices well below cost of production, generally estimated at some Aus$5.00-5.50 per kilogramme of milk solids.

Fonterra Australia, the Australian arm of New Zealand-based processing giant Fonterra, on Thursday unveiled an opening farmgate milk price of Aus$4.75 per kilogramme of milk solids for producers in the looming 2016-17 season, although it forecast that the figure would recover to Aus$5.00 per kilogramme of milk solids by the end of the marketing year.

"We are still seeing an imbalance between global milk supply and demand," said Judith Swales, a senior executive at Fonterra Australia.

Huge world inventories

On Tuesday, Murray Goulburn, Australia's top milk processor, stunned the industry by unveiling an opening price of Aus$4.31 per kilogramme of milk solids, although the processor again highlighted scope for a rise in values over the season, to Aus$4.80 per kilogramme of milk solids.

The opening call of Aus$4.31 per kilogramme of milk solids also included a repayment of Aus$0.14 per kilogramme of milk solids relating to a milk support package for producers.

David Mallinson, Murray Goulburn's interim chief executive, said that "global market conditions have not improved, and the latest data suggests excess global inventories, including the impact of European intervention, may have surpassed the equivalent of 6bn litre of milk.

"Key commodity prices have remained below $3,000 per tonne for almost two years, much longer than historical price downturns."

He added that the processor was forecasting that dairy commodity prices "will continue to trade around current levels for the remainder of the 2016 calendar year with only a modest recovery in price of around 6% across Murray Gouldburn's major commodities" during the first six months of 2017.

Price revival prospects

Fonterra's Judith Swales on Thursday flagged some reason for optimism on prices, saying that "there are signs in key producing areas of a slowdown in production, and increased imports into key markets such as China, Asia and Latin America.

"This supports out view of a recovery in global prices as we move the [2016-17] season."

However, separately, National Australia Bank said that it expected dairy prices to "remain low for the foreseeable future.

"We do not expect a substantial increase in Chinese demand in the coming year," the bank said.

Nonetheless, "downside pressure" on prices may be limited by the dent from weaker values to production prospects in Europe, whose growth in output, after the removal of quotas last year, has been seen as a primary reason of the extended market downturn.

By Mike Verdin

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