NEW Zealand dairy cooperative Fonterra has dropped its milk price to its lowest level for eight years.
Chairman John Wilson said the reduction reflected the continuing and significant volatility in international dairy commodity prices caused by over-supply in the market.
Media Release: Fonterra Revises 2014/15 Forecast Milk Price. Read more: http://t.co/gsHOW1V5Kk— Fonterra (@Fonterra) April 29, 2015
And while analysts have pointed out the New Zealand reduction did not mean prices would drop for UK producers, Fonterra’s prediction of increased milk production would only add further negative sentiment to world markets and cause traders to be even more cautious than they have been already.
Mr Wilson said: "We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GDT prices for products inform our farmgate milk price have fallen 23 per cent since February.
“This reduction will impact cash flows for our farmers, who will need to continue exercising caution with on-farm budgets.
“Our farmers are already managing very tight cashflows. Although this reduction is not the news that anyone wants, it is important we keep our farmers updated given the significant market uncertainty.
“Given the reduced Milk Price forecast, we are also lowering the Advance Rate of scheduled monthly payments to our farmers."
The reduction followed Fonterra’s revision of New Zealand milk production for the 2014/15 season from a fall of 2.1 per cent to 1.3 per cent growth, meaning production could end up at about 21 billion litres for the year - up 700m litres.
This means the milk price has gone from $4.70/kilograms milk solids (kgMS) to $4.50/kgMS (17ppl equivalent).
Dairy analyst Chris Walkland said by pulling the price lever, Fonterra could prompt more farmers to cull cows from their herds, potentially helping global dairy prices turn round sooner as volume is lost from the market.
He added: "Buyers are reacting to how much milk Fonterra says it is going to have. If farmers are therefore culling harder it could help turn round the market sooner.
"The whole market is driven by sentiment. There is a lot of milk around at the moment and buyers know that and are buying more to hand to mouth than if milk is short."