25 Sep 2014

Dairy price volatility behind downturn

8:36 am on 25 September 2014

Volatility in the global dairy market is to blame for a downturn in forecast payouts for New Zealand farmers, Fonterra head Theo Spierings says.

Fonterra revised down its forecast for this season when announcing its annual results yesterday, slashing the predicted payout from $6 per kilo of milk solids to $5.30. However, it confirmed its record payout for last season's milk of $8.40 per kilo of milk solids.

Fonterra chief executive Theo Spierings, second from right, announcing the profit fall.

Theo Spierings, second from right, announcing the profit fall yesterday. Photo: RNZ / Kim Baker Wilson

The dairy giant's net profit for the year to July fell 78 per cent to $157 million from $718 million last year.

Chief executive Theo Spierings told Radio New Zealand's Morning Report programme demand for dairy products has fallen in the Chinese and Middle Eastern markets but is slowly returning.

However global conflicts could have an effect. "I am particularly worried about the geopolitical issues in the Middle East, in Russia, Ukraine and the Ebola situtation in West Africa."

Mr Spierings said it was possible this season's payout, which has dropped twice already, could fall again.

According to industry body Dairy New Zealand the latest drop in Fonterra's forecast milk price will deprive regional economies of more than $1 billion if it stands.

General manager of research and development David McCall, told the programme farmers with significant debt may struggle with the low payout.

"We've gone from a record payout last year ... to right at the very bottom of what we would expect prices to be given long-term trends."

While the payout could go lower, the long term outlook was good, he said, with the Asian market growing by about three percent per year.

ANZ Bank rural economist Con Williams said dairying is the country's biggest export earner and the headline figure looks like about a $5 billion cut in dairy export earnings, which flows through to the wider economy.

Opposition parties say as well as hurting farmers, the lower forecast payout will mean a big cut in the Government's tax take.

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