Fonterra Cuts Jobs as Milk Rout Threatens New Zealand Growth

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Fonterra Cooperative Group Ltd. will cut 523 jobs as the world’s largest dairy exporter grapples with a slump in prices that’s threatening economic growth in New Zealand.

The cuts will incur a one-time cost of NZ$12 million ($7.8 million) to NZ$15 million, the Auckland-based company said Thursday in a statement. That will save NZ$55 million to NZ$60 million a year, it said. Fonterra had more than 18,000 employees as of July last year, according to its website.

Since Fonterra said in March that it was reviewing the business, dairy prices have extended declines to a six-year low amid increasing supply. The weaker outlook may hit economic growth in New Zealand, which gets a quarter of its export earnings from dairy, prompting the central bank to cut interest rates again. The New Zealand dollar fell to the lowest since 2009 on Thursday.

“If you thought dairy prices were ugly before, they are horrendous now,” Bank of New Zealand Ltd. analysts including head of research Stephen Toplis wrote in a note. “It will hit New Zealand’s economic growth, lower the terms of trade further and widen the current account deficit.”

The price of whole milk powder fell to $1,848 a metric ton in the latest GlobalDairyTrade auction. That’s the lowest since July 2009. A United Nations index of world dairy prices has dropped 32 percent in the past year. The kiwi fell as much as 1.3 percent to 65.07 U.S. cents, the weakest since July 2009.

Rate Cuts

Tumbling milk powder prices are prompting banks to lower farmer payout forecasts. ANZ Bank New Zealand Ltd. predicts the payout may be as low as NZ$3.75 a kilogram of milksolids this season. Fonterra has forecast NZ$5.25 in 2015-16 and it compares with a record NZ$8.40 in 2013-14.

Falling farm incomes may add to signs Reserve Bank of New Zealand Governor Graeme Wheeler will cut the official cash rate to 3 percent on July 23 following a quarter-point reduction last month. The central bank may lower the cash rate to 2.5 percent by October, according to AMP Capital Investors Ltd.

Any respite from lower milk prices may be delayed. Increasing global inventories and higher production led by the European Union are pushing back an expected rally in prices until next year, Rabobank International estimates. World output of milk, cheese and butter will rise to records this year, the U.S. Department of Agriculture estimates.

Units in the Fonterra Shareholders’ Fund, which tracks dividends paid by the company, dropped 1.5 percent to NZ$4.70, the biggest drop since May 7.

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