New Zealand's diary giant Fonterra lowered its forecast for farmer payouts for the 2014/15 season citing falling world dairy prices and a strong New Zealand dollar.
The 2014/15 Farmgate Milk Price forecast was lowered to NZ$6 per kg of milk solids from its earlier estimate of NZ$7 per kg in May, the company said in a statement.
The New Zealand dollar fell after the Fonterra announcement. "Today's announcement from Fonterra was lower than most in the market were expecting, and will come as a shock to farmers," Westpac Chief Economist Dominick Stephens said.
"This forecast is one more reason to expect further downward pressure on the New Zealand dollar."
Fonterra also announced an estimated dividend 20-25 cents per share - amounting to a Forecast Cash Payout of NZ$6.20- NZ$6.25 for the current season.
"We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices," Fonterra Chairman John Wilson said.
"Our milk collection across New Zealand last season ending 31 May 2014 reached 1,584 million kgMs, 8.3 per cent higher than the previous season."
Fonterra CEO Theo Spierings said the company expects reduced cost of goods arising from lower dairy commodity prices to have a positive impact on returns during the first half of the current financial year.
The company also expects some recovery in global dairy prices, but said it is too early to predict how strong this recovery will be or when it occur.
"At this stage of the season, the final payout remains very uncertain," Westpac's Stephens said.
Westpac assumes a small further reduction in auction prices over the next month or two. The firm expects a very substantial recovery in auction prices, but not until the last quarter of this year.
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