Farm incomes in New Zealand, the world’s biggest dairy exporter, may remain under pressure throughout 2016 after milk powder prices slumped to a near six-month low.
Whole milk powder fell to $1,952 a metric ton at the GlobalDairyTrade auction Tuesday, the lowest since Aug. 18. The quantity weighted milk powder price index fell 10.4 percent from the previous sale on Jan. 19. An index for all dairy products sold at the auction fell 7.4 percent.
Powder prices have dropped 31 percent since October, putting pressure on Fonterra Cooperative Group Ltd.’s payout to its New Zealand farmers and damping the outlook for economic growth. Fonterra last week cut its forecast payment for the season ending May 31 to a nine-year low of NZ$4.15 ($2.69) a kilogram of milk solids.
“Last night’s auction introduces some downside risk to our payout forecast for this year,” Anne Boniface, senior economist at Westpac Banking Corp in Auckland, said in an emailed note. “But perhaps even more importantly, it also throws our milk price forecast for 2016/17 into the spotlight.”
Westpac is tipping the payout will recover to NZ$5.20 a kilogram next season, assuming whole milk powder averages around $2,400 a ton. “These levels currently look some way off,” Boniface said.
Farmers are curbing spending as their incomes decline, damping New Zealand’s economic expansion. Reserve Bank Governor Graeme Wheeler last week held the official cash rate at a record-low 2.5 percent and said some further policy easing may be required this year. Dairy prices were a risk to the outlook, he said.
The latest auction result “reinforces our OCR view,” Nathan Penny, economist at ASB Bank in Auckland, said in a note. “We expect two further cuts in June and August, taking the OCR down to 2 percent.”