The average Fonterra farmer might be $78,000 less well off a year if dairy prices fall as predicted.
ASB analyst Nathan Penny said the dairy giant has forecast farmers will receive $7 per kilogram of milk solids for the 2018-19 season, but that is under threat after a 9 per cent fall in global dairy auction (GDT) prices in recent months.
Penny predicted the price would drop to $6.50.
Dairy NZ economist Matt Newman said while a 50 cent fall might not appear a lot, it did when translated into an average farmer’s annual earnings.
For a farmer with the average milking herd size of 414, producing 157,000 kg of milksolids, the “loss” would amount to $78,000. However, because farmers have not yet received payments at the $7 level, it is a loss of expectation.
Prices following Wednesday’s GDT were largely unchanged, but the result confirmed that key Chinese demand had shifted lower and taken prices with it, Penny said.
“In dairy terms the 9 per cent drop isn’t huge, it’s an adjustment but not a material change in markets.”
“Initially, with global demand still firm, the fall looked like it could prove temporary. But this no longer appears the case.”
“The catalyst for change has been the escalation in US-China trade tensions, but the mechanism through which dairy prices have been impacted has been currencies. In particular, the Chinese yuan has fallen against not just the US dollar, but also the New Zealand dollar,” Penny said.
Prices would come under further pressure once milk production came on stream in the next three months.
Penny said ASB’s own forecast of per $6.50 was under review.
Rabobank analyst Michael Harvey was more optimistic, saying the GDT result would be encouraging for dairy exporters given it brought to an end four consecutive falls at the previus trading sessions.