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New Zealand milk output to pull out of decline, as prices recover

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Milk production in New Zealand will rise in 2017-18 for the first time in three years, to judge by Fonterra projections, although volumes will remain below record highs, amid some lingering financial worries in the industry.

Fonterra, which processes the great majority of New Zealand's milk output, in its first forecast for collections in 2017-18, which started this month, pegged them at 1.575bn kilogrammes of milk solids.

That would represent an increase of 3.2% year on year, and end a downturn in output which kicked in as tumbling milk prices deterred producers, cutting milk values below the cost of production, and landing many farmers with substantial debts.

Fonterra's milk price to farmers dropped from NZ$8.40 per kilogramme of milk solids in 2013-14 to NZ$3.90 per kilogramme of milk solids two seasons later.

Debt struggles

However, values have since recovered to NZ$6.15 per kilogramme of milk solids for last season, with a forecast payout by Fonterra of NZ$6.50 per kilogramme of milk solids for 2017-18.

"The improved milk price environment should provide support to farmers' milk production plans," the co-operative said.

Nonetheless, collections will remain below the record 1.62bn kilogrammes of milk solids set in 2014-15, encouraged by momentum from the record payout the previous season, with the nature of milk production enforcing a lag in the effectiveness of price signals in influencing output volumes.

Indeed, earlier this week, real estate institute Reinz, while seeing a 6.8% recovery in New Zealand dairy farm values over the past year, flagged the prospect of forced sales.

"Financier-instigated activity… confirms recent comments from the Reserve Bank that some farmers may struggle to cope with the debt levels built up over recent seasons, with selling being the only option in such cases."

Herd cuts curtailed

Still, New Zealand's recent milk production record has been far better than had been expected, with Fonterra initially forecasting a 7% slide in its collections for last season, more than twice the rate of decline actually realised.

Last month, US Department of Agriculture's bureau in Wellington hiked by more than 700,000 tonnes, to 21.9m tonnes, its forecast for New Zealand milk production in calendar 2017, citing factors including benign weather early in the year, besides higher milk prices.

Overall, recovering milk payouts are "boosting farmer confidence, which will flow through to extra farm inputs being purchased if necessary," the bureau said.

"In-milk cow numbers have not been reduced by nearly as much as previously expected. At an estimated 5m head, this is 100,000 head greater than had been previously forecast."

By Mike Verdin

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