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Fonterra cites need for EU dairy pullback, as it cuts milk price hopes

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Fonterra became the second New Zealand dairy group this week to blame the European Union for continued weakness in values as it cut its forecast for its milk prices to a seven-year low.

The Auckland-based group, the world's top milk exporter, cut its estimate for its 2015-16 payout to its producers to NZ$4.15 per kilogramme of milk solids, from a previous estimate of NZ$4.60 per kilogramme of milk solids.

The downgrade, which takes the forecast payout below the NZ$4.40 per kilogramme of milk solids paid last season, follows similar moves by rivals such as Westland Milk Products, which earlier this week cut its forecast to NZ$4.15-4.45 per kilogramme of milk solids, from NZ$4.90-5.30 per kilogramme of milk solids.

Open Country Dairy, New Zealand's second-ranked processor after Fonterra, earlier this month cut its forecast to NZ$4.00-4.30 per kilogramme of milk solids.

And it reflects a further push back in the timetable for when Fonterra foresees a dairy prices recovery.

EU factor

Theo Spierings, the Fonterra chief executive, said that, despite continued "sluggish" demand in the dairy market, he "supported the general view that dairy prices will improve later this calendar year".

"However, the time frame for supply and demand rebalancing has moved further out," he said.

It also "largely depends on a downward correction in European Union supply in response to the lower global prices".

Current price levels "are clearly unsustainably low for farmers globally and cannot continue in the longer term".

However, EU output - which was rising at 5% year on year in November, the latest data available – has been supported by the removal of production quotas last year, which provoked a ramp-up in volumes in some countries, such as Ireland and Belgium, whose warm and wet climates promote good pasture condition.

'Overpaying for milk'

John Wilson, the Fonterra chairman, said that "there is still an imbalance between supply and demand which continues to put pressure on global milk prices.

"Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase."

The comments echo those from Westland earlier this week, which said that "the major global driver of downward prices is the ongoing growth of milk supply in Europe and the US".

European Union processors were "overpaying" for milk amid the industry shake-up following quota removals, Westland added.

Losses for farmers

Fonterra underlined its "confidence" in the dairy market long-term, saying that "international dairy demand will continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics".

The current milk price weakness reflected a "unique series of global issues".

However, the co-operative's milk price downgrade was seen by producers' group DairyNZ as underlining the "tough" conditions for farmers, whose average breakeven cost they estimate at NZ$5.40 per kilogramme of milk solids.

By Mike Verdin

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