Cows are pictured during an international agricultural exhibition in the outskirts of Minsk June 4, 2014. Farmers and agriculture companies from 14 countries gathered near the Belarussian capital to show their products on Wednesday. REUTERS/Vasily Fedosen
IN PHOTO: Cows are pictured during an international agricultural exhibition in the outskirts of Minsk June 4, 2014. Farmers and agriculture companies from 14 countries gathered near the Belarussian capital to show their products on Wednesday. Reuters/Vasily Fedosenko

New Zealand's largest dairy company, Fonterra Cooperative Group has slashed its forecast farmgate milk price for the 2014/2015 season to $4.70 per kilogram of milk solids, from the previous $5.30 per kgMS, citing the crash of global dairy trade prices to the lowest levels since 2009.

In a recent statement, Fonterra said "When combined with the previously announced estimated dividend range of 25-35 cents per share, this means a forecast cash payout of $4.95 - $5.05 for the current season". Speculations were rife that the Fonterra board meet would prune the September forecast to under the $5 kg/MS mark.

After Wednesday's board meeting, chairman John Wilson agreed that there were concerns that the revision will put pressure on farming business budgets. He said it was inevitable considering the volatility existing in global dairy markets. Right now a number of factors are delaying a sustained return to higher global prices, reported Business Scoop News.

Excess Supply

The Fonterra milk price cut is being justified on the ground of excess global milk supply that is outstripping demand and leading to GlobalDairyTrade prices of milk powder crashing an average 16.9 percent since late September. The prices of skim milk powder prices also crashed 7.7 percent. Whole milk powder was sold at US$2,229 a tonne in last week's Global DairyTrade auction, that was well below the $3,500 tonne that Fonterra chief executive Theo Spierings had promised.

"Falling oil prices, geopolitical uncertainty in Russia and Ukraine and subdued demand from China continue to affect inventory and contributing to ongoing volatility and weak demand," Wilson said.

The Chairman claimed that the new forecast reflects the management's best estimates at this time. Given the uncertainty in advising farmers to to be cautious with budgeting, it is also an effort in updating them as the season progresses, he said.

Farmers had been watching with concern, how Fonterra wat at the trimming exercise of farm gate milk price from the previous $7 per kg/MS to $6 and then in September to $5.30 per kg/MS with a dividend range of 20-25 cents per share. It makes a stark comparison to a record $8.40 payout of the last season. The CEO Spierings said Fonterra was undertaking a targeted programme to generate more cash to support the farmers. He said, Fonterra will continue to exercise tight controls on operating expenditure, and will be driving harder on working capital and deferring capex, without affecting the V3 business strategy.

Farmers Hit

Though Fonterra's milk price payout was expected, it frustrated many, including new entrants into the dairy industry. According to Kiwi farmers union, Federated Farmers and its Dairy Chairperson Andrew Hoggard, the Fonterra payout reduction has put 'real pressure' on dairy farmers with a large debt load. "Sharemilkers who bought into the industry on a budget structure around $6 will find the going really hard, because they are not getting any returns from last year either," Hoggard told Agriland News.