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Fonterra warns over dairy 'oversupply' as it cuts milk price hopes

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Fonterra cut its forecast for 2014-15 milk prices for the fourth time, citing twin setbacks from market "oversupply" and dents to demand from factors such as low oil prices and even the flood of refugees into Europe.

The New Zealand-based dairy giant cut by NZ$0.20 to NZ$4.50 per kilogramme of milk solids the price that it expects its producers to receive for milk this season.

This would be the lowest farm gate price paid by Fonterra since 2007, and is well below the level of about NZ$5.40 per kilogramme of milk solids which according to industry group DairyNZ represents breakeven costs for farmers.

Fonterra said that its downgrade - which came the day after smaller rival Westland Milk Products cut its forecast milk price to NZ$4.90-5.10 per kilogramme of milk solids from NZ$5.00-5.40 – reflected a market that has "not yet rebalanced" from a period of raised production and depressed import demand which drove dairy prices sharply lower last year.

"Significant volatility"

John Wilson, the Fonterra chairman, flagged "the continuing and significant volatility in international dairy commodity prices caused by oversupply in the market".

Separately on Thursday, data from Australia dealt a blow to hopes for slowing production growth, with Dairy Australia reporting March milk production up 4.9% year on year to 673.7m litres.

Theo Spierings, the Fonterra chief executive, noted headwinds to consumption, noting that "geopolitical unrest in places such as Russia, the Middle East and North Africa is impacting global dairy demand.

"Remote as they are, events such as the flow of refugees from Libya to Europe come together with factors like lower oil prices to soften dairy demand," Mr Spierings said.

Many major oil producing nations, such as Algeria and Nigeria, are also milk importers, and lower crude prices seen as lowering their appetite for dairy purchases.

Rally collapses

Fonterra's price cut follows the collapse of an early-year rally in dairy prices at GlobalDairyTrade auctions, run by Fonterra.

"GlobalDairyTrade prices for products that inform our farmgate milk price have fallen 23% since February," Mr Wilson noted.

The GlobalDairyTrade Index, which is shows global milk prices based on activity on Fonterra's own milk auction website, showed some recovery earlier this year, but has now fallen back to near the lows of late 2014, as global dairy fundamentals remain weak.

"We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GDT prices for products that inform our Farmgate Milk Price have fallen 23 per cent since February," said Mr Wilson.

By Agrimoney.com

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