17 May 2012

Fall in dairy payout predicted

7:24 am on 17 May 2012

Flagging demand and stronger global dairy production may knock more than $1 off next season's payout to Fonterra's farmers.

Concern about slowing global growth pushed dairy prices down further to their lowest level in two-and-a-half years, with Fonterra's Global Dairy Trade-Weighted Price Index declining to an average selling price of $US2618 a metric tonne, a fall of 6.4% compared with the previous auction.

Fonterra says it's selling more on the auction site while supply from other major producers like the US has surged and demand has remained steady.

But BNZ markets economist Doug Steel says Europe's debt crisis and signs of slowing growth in China are clearly weighing on prices.

He says the price is not only being pulled down by a short term supply issues but also the outlook for demand in the longer term.

Mr Steel says in the initial stages, through February and March, it was a milk supply issue, but recently a broad based decline in dairy prices for the 2012 period is more likely to be due to concern around demand growth.

Fonterra has forecast a payout of $6.75 - $6.85 per kilogram of milk solids for the season just finished.

Mr Steel is expecting little change to that but says next season will be a different story, and is tentatively estimating a payout of less than $6 per kilogram for for 2012/13.

"It's a long time between now and the end of next October, when that new season's payout is finalised, so plenty of things can happen between now and then that we didn't see coming."