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Fonterra flags signs of China dairy revival as it holds milk price outlook

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Fonterra flagged "signs of" long-awaited in dairy, in particular in the key Chinese market, as the world's top milk exporter stood by its price forecast despite a retreat in values at a key auction.

The New Zealand-based co-operative said it was sticking with a forecast that its farmer owners will receive NZ$4.60 per kilogramme of milk solids in 2015-16, a small rise year on year, and well above the NZ$3.85 per kilogramme of milk solids it had forecast the earlier in the season.

The decision to hold with the milk price came despite a drop of some 6% in prices at Fonterra's benchmark GlobalDairyTrade auctions since September, when the NZ$4.60 figure was first released.

However, John Wilson, the Fonterra chairman, said that the co-operative's forecast factored in prospects "over the next nine months", besides views that "unsustainably low" prices will continue to undermine world milk production, and bring supply back closer to matching demand.

"We support the consensus view... that an improvement will take place," he said.

'Imbalance reducing'

Indeed, the "imbalance" in dairy markets "is starting to reduce", Mr Wilson said, noting that production in New Zealand, the top milk exporting country, was seen dropping by at least 6% this season.

US production growth, up 2.4% in 2014, had slowed to some 1%, he said.

The comments which came hours after the US Department of Agriculture cut by 400m pounds to 208.3bn pounds its forecast for domestic milk output this year, representing an increase of 1.1%, in a downgrade reflecting lower expectations of yields per cow.

Fonterra said, however, that EU farmers, freed in April from output quotas, were "continuing to push production".

Danish-based Arla on Wednesday forecast its farmers raising volumes by some 3% a year to 2020.

China import revival

Furthermore, "there are signs of recovery, particularly in China", whose retreat from the international market, after a buying spree that sent stocks soaring, has also been seen as a major factor in the drop in dairy commodity prices to levels which in August hit their lowest in 13 years.

The comments come amid hopes of a revival in Chinese dairy imports which, while down 15% in the first nine months of 2015, led by a 54% slump in whole milk powder volumes, have shown signs of recovery since July.

Indeed, China's imports in September were 25% higher than a year before, including increases in purchases of all major dairy commodities.

Loan scheme ditched

Fonterra added that it was suspending its programme of interest free loans of up to NZ$0.50 per kilogramme of milk solids to its farmers, introduced when farmers were expected to receive just NZ$3.85 per kilogramme of milk solids for their milk.

Fonterra had "weighed up the improved" milk price forecast since the loan was announced, Mr Wilson said.

By Mike Verdin

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