Westland Milk cuts farmgate payout further as weak dairy prices weigh

Wednesday 29th July 2015

Westland Milk Products, New Zealand's second largest dairy cooperative, cut its forecast milk payout to farmers by 10 cents for the current season and for next season's by $1, in the face of sustained weakness in global dairy prices.

The Hokitika based company will pay $4.80 to $4.90 per kilogram of milk solids for the 2014/15 season, with the final payout to be determined at the September board meeting, it said in a statement. The forecast payout for the 2015/16 season was slashed to between $4.60 and $5/kgMS, from a previously band of $5.60 to $6/kgMS.

The advance rate for this season remains at $4.80/kgMS, although the 2015/16 season rate was revised to $3.80/kgMS from $4.40/kgMS.

Prices for whole milk powder, the country's key commodity export, have plunged this year, and dropped an unexpectedly large 10.7 percent in the GlobalDairyTrade auction earlier this month. Dairy prices are now expected to remain lower for longer than previously forecast, amid higher global supplies, weak demand in China and an import ban in Russia on European dairy products, which are being sold into other markets.

“Price volatility is at extreme levels with a fall of more than 20 percent in one month, with prices in New Zealand dollars now lower than during the global financial crisis," chairman Matt O'Regan said. "Demand from China remains soft and is unlikely to firm up before the end of this calendar year. The ongoing sanctions against Russia limit purchasing activity from this large global dairy importer, especially from Europe. This makes the milk oversupply even more of a problem for New Zealand exporters, as European competitors look more aggressively to the international market to sell.”

Fonterra Cooperative Group, the world's largest dairy exporter, is expected to lower its forecast payout to farmers for this season following its board meeting next month. The Auckland based company currently forecasts a payout of $5.25 per kilogram of milksolids for the 2015/16 season, from $4.40/kgMS last season and a record $8.40/kgMS the previous season. Economists expect a payout of between $3.75/kgMS to $5/kgMS for this season, while Dairy NZ estimates $5.70/kgMS is the industry average breakeven point for most farmers.

Westland has put its cost structure under review as it seeks to squeeze more out of its value-added products, O'Regan said.

"In particular, savings on freight are being progressed, capital spend is being limited to critical repairs or very high returns only, and staff costs are being put under the microscope," he said. "As our capacity to produce these high value products increases, the proportion they contribute to payout will also increase, giving us greater independence from the dramatic bulk commodity price swings that have been so very evident this year."

BusinessDesk.co.nz

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