Dairy analysts have lowered their forecasts for this season's payout to farmers following another disappointing global auction. The result has increased the concern that some struggling farmers will be forced to sell their land.
The GlobalDairyTrade Price Index fell 2.8 percent to US$2235. That was the fourth consecutive fall and means prices are at their lowest level since September last year.
Whole milk powder, which is a crucial export product for Fonterra, fell 3.7 percent to US$1,890 per metric tonne. Skim milk powder prices slipped 1.4 percent to US$1,792.
Analysts at AgriHQ have lowered their forecast payout to $4.05 per kilogram of milk solids. That is 10 cents below Fonterra's forecast of $4.15 (which Fonterra had lowered from its earlier estimate of $4.60).
"Overall market sentiment still remains very bearish meaning a sustained price recovery is unlikely to occur until the later part of 2016," says AgriHQ dairy analyst Susan Kilsby. "Prices are now at very attractive levels for buyers which will stimulate a little extra demand. But while global milk supplies continue to grow it is difficult for a sustained market recovery to occur."
Supply is up in Europe, while in New Zealand recent wet weather has softened the expected impact of the El Niño weather pattern.
Waikato University's professor of agribusiness Dr Jacqueline Rowarth told the Paul Henry progamme this morning that dairy farmers are facing a major cash-flow problem. The forecast payout for this season is below the cost of production for many farmers.
"That is why they have to keep milking, to enable some sort of cash flow to be coming in. But the banks are saying we can't put any more of the interest onto your debt because your debt-to-asset ratio is going wrong."
She has been told 37 Southland dairy farms have recently been put up for sale "because the banks say they can't stay in business, the farmers, which is very bad news."
Dr Rowarth would like to see the Reserve Bank cut the official cash rate (OCR) "right now" to lower borrowing costs for farmers.
There are signs that prices for dairy products will start to rise in the later part of the year.
But that may not be enough for many farmers.
Last week economists at Westpac cut their prediction for the 2017 season to $4.60 from an earlier estimate of $5.20. ANZ had earlier cut its forecast for 2017 to $5.00 from an earlier estimate of $5.50 - $5.70.
That would mean three consecutive years in which the payout has been below the level most farmers need to break even.
Yesterday Australian bank NAB (owner of BNZ) reported its first increase in bad and doubtful loans in almost six years, due to the New Zealand dairy sector. It said its exposure to impaired assets in New Zealand dairy rose to $420 million during the three months to December.
However NAB said it did not currently expect losses from these loans.
Last week Commonwealth Bank of Australia, which owns ASB, said dairy loans were the main reason its loan impairment expenses had climbed 11 percent to NZ$41 million.
But the banks and analysts say that the risks are manageable.
Total dairy debt in New Zealand now stands at around $37.9 billion, up from $29 billion in 2009.