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Dairy Prices Extend Decline, Pressuring Fonterra Milk Payout

Dairy prices fell for a fifth straight auction, suggesting Fonterra Cooperative Group Ltd. (FSF) may have to reduce its forecast milk payout to New Zealand farmers.

The GlobalDairyTrade Price Index dropped 2.6 percent in a two-weekly auction overnight, extending its cumulative decline in the last five events to 21.9 percent. Whole milk powder prices eased 1.6 percent for a 21.8 percent drop over the past 10 weeks.

Fonterra, the world’s biggest dairy exporter, is currently forecasting a record payout of NZ$8.65 per kilogram of milk solids to its 10,000 farmer shareholders for the 2013/14 season. The New Zealand dollar fell after the previous dairy auction two weeks ago, when the price index slumped 8.9 percent.

“The recent softness in GDT prices could shave NZ$0.20 to NZ$0.25 a kilogram off Fonterra’s current milk price,” ANZ Bank economists said in a note to clients this morning. “This would only take the cream off the top of an otherwise stellar year.”

The New Zealand dollar traded at 86.45 U.S. cents at 9:30 a.m. in Wellington, down from 86.94 cents at the same time yesterday. The currency reached a 32-month high of 87.15 cents on April 9.

“There are fundamental reasons for the New Zealand dollar to be lower, not least declining commodity prices,” Raiko Shareef, a currency strategist at Bank of New Zealand in Wellington, said in a research note. While it will take months for lower dairy prices to flow into terms of trade data, “we doubt markets will wait around that long before reassessing the NZD’s value,” Shareef said.

The Reserve Bank of New Zealand raised interest rates from a record low last month and said it will continue to tighten monetary policy to curb inflation, boosting demand for the kiwi dollar. Inflation data for the first quarter will be published by Statistics New Zealand at 10:45 a.m. in Wellington today.

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net Malcolm Scott, Edward Johnson

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