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'Dairy is sound' says Fonterra, even as it mulls job cuts

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Fonterra restated its faith in the future of dairy markets, even as it revealed it was consulting staff over job cuts, and hours after a major food report forecast milk powder prices not returning to 2012-14 highs for at least a decade.

Theo Spierings, chief executive at the New Zealand-based milk giant, said that the "long-term future of dairy is sound", albeit noting that the dairy markets were proving "increasingly volatile".

The comments came even as Fonterra revealed it was consulting staff over job cuts, as part of a strategy to "streamline" its business, a drive which the co-operative last month suggested could lead to hundreds of job losses.

"To keep ahead of the game, we need to be more agile, reduce costs and generate value," Mr Spierings said.

They also follow a report from the Food and Agriculture Organization (FAO), the UN's food agency, and the OECD forecasting that while dairy prices will see a long-term recovery, values of both skim and whole milk powder will not by 2024 regain their average for 2012-14.

Herd declines

The FAO-OECD report forecast average annual growth of 1.8% in world milk production in the period to 2024, a little below the 1.9% expansion seen in the past decade.

"Cow numbers are expected to decline in developed countries, whereas herd expansion in developing countries is projected to slow down," the briefing said.

Developing countries are also to lead dairy consumption, with annual growth rates of up to 2.0%, potentially twice as fast as expansion expected in developed nations.

The FAO-OECD forecast skim milk powder prices, as measured in the Oceania export market, recovering from an average of $2,678 a tonne this year to $3,630 a tonne in 2024 – a rise of 36%, but still below the average of $3,771 a tonne between 2012-14.

Whole milk powder prices will rise from $2,941 a tonne this year to $3,728 a tonne in 2024 – a rise of 27%, but again leaving values below the 2012-14 average of $3,900 a tonne.

Collapsing prices

Indeed, global dairy prices rose to record highs in 2013 and early 2014, as China, the world's largest importer, bought whole milk powder on a large scale.

However, when the Chinese buying dried up, following what is understood to have been a massive inventory accumulation, the milk price collapsed.

And while at the start of 2015 it looked like a floor had been found in dairy prices, amid fears of drought in New Zealand, the top milk-exporting country, the rally could not hold.

Prices at GlobalDairyTrade, the dairy auction run by Fonterra, set a fresh six-year low on Wednesday, with no sign of Chinese buyers returning in force, while supply is boosted by the extra capacity taken on in the boom years.

The market has also seen weaker buying demand from Russia thanks to sanctions and currency issues, while the European dairy industry was recently deregulated, leaving producers poised to increase production further.


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