Fonterra cuts forecast milk price payout to farmers as demand drops

Fonterra has cut its milk price payout range for the first time this financial year, as short-term global demand drops.

The co-operative now expects this season's payout to farmers to be between $9.10 and $9.50 per kilogram of milk solids compared to the prior forecast of between $9.30 and $9.90 per kgMS.

The new mid-point of $9.30 would still be a record payout for farmers.

Fonterra chief executive Miles Hurrell said the downgrade was due to a number of recent factors which resulted in short-term impacts on global demand for dairy products.

They included lockdowns in China due to Covid-19, the economic crisis in Sri Lanka and the Russia-Ukraine conflict, he said.

"As an exporter to 140 countries we deal with these kinds of global events all the time, but right now we're seeing the impact of multiple events."

Coupled with inflationary pressures, it was surprising to see buyers being cautious, he said.

"This will be disappointing for our farmers, but the change in global dairy prices is coming off record high levels."

The forecast milk price payout had been upgraded several times this financial year as demand outstripped supply.

He said the new payout would still see about $14 billion pumped into the local economy through milk price payments.

The downward revision on the milk price payout follows the fall in global dairy prices of 8.5 percent at the most recent global dairy auction - the biggest single drop since 2015.

The price for whole milk powder, a key driver of the price local farmers are paid, had fallen 18 percent over the past four auctions.

Hurrell said while the long-term outlook for dairy remains positive, he expected global supply and demand to be more balanced over the rest of the year.

Global milk production was expected to be constrained in the northern hemisphere by high feed, fertiliser and energy costs, he said.

"We expect demand to recover as the short-term impacts begin to resolve.

"While there is still a high level of uncertainty in global markets, the majority of our milk has been contracted for the season. It's for this reason that we've made the decision to narrow our forecast range to plus or minus 20 cents."

Hurrell said the co-operative would continue to monitor the potential effects on demand from inflationary pressure, rising interest rates, Covid-19 and geopolitical events.