3 Jun 2009

Growing fears for Fonterra milk payout

6:33 pm on 3 June 2009

There are growing fears Fonterra's new forecast payout to New Zealand farmers may be at risk.

Last week, the dairy co-operative announced an opening price of $4.55 per kilo of milk solids for the 2009-10 season, but this has been beset by a surging New Zealand dollar and falling prices.

The 65 cent drop in the forecast payout from $5.20 to $4.55 for the coming season was already set to suck nearly $1 billion out of farmers' pockets.

But American subsidies - and the fear of reprisals from European governments - have undermined prices at Fonterra's latest milk powder auction.

Falls at each of the past two auctions have all but wiped out a 20% rise in prices in March and April.

A 4% rise in the value of the Kiwi in under a week means Fonterra is set to receive less for the US dollars it gets from selling overseas.

Milk powder prices fall 12%

The decision by the US to restore dairy subsidies is behind a 12% fall in prices at Fonterra's latest monthly milk powder auction, the dairy giant says.

The price for whole milk powder fell 12% at the auction on Tuesday night.

In May, the price fell 4.1%. The two-month decline almost wipes out a 20% gain in March and April.

Prices had been showing signs of reviving following a 60% slump since peaking in 2008.

Fonterra's managing director of global trade Kelvin Wickham says that recovery is now uncertain.

He says uncertainty will remain until there is more clarity on what the US intends to do with subsidies and how the European Union may react.

The United States government is to subsidise the export of more than 90,000 tonnes of milk powder, butter and cheese in response to a similar European Union move earlier this year.

Mr Wickham says the result also indicates lower demand for the longer-term contracts and confirms the company's view that international diary markets will remain weak until consumer demand improves.

Westpac economist Doug Steel says the price slump comes just as Fonterra battles a surge in the value of the New Zealand dollar.

Mr Steel says the auction price is in US dollars, and when converted to New Zealand dollars, the price looks even worse and could put at risk Fonterra's payout forecast to dairy farmers.