Payout forecast down to $5.40/kg

TIM CRONSHAW
Last updated 05:00 04/08/2012

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West Coast dairy farmers are heading for tough times after a milk-payout forecast was lowered to an unflattering $5 to $5.40 a kilogram of milksolids.

For many farmers the revised payout by their co-operative, Westland Milk Products, is close to their break-even margin.

The Coast's vital business cog, with a $525 million turnover, was forced yesterday to shave off 70 cents from the previous forecast as a result of lower international prices and milk supplies exceeding demand.

It remains to be seen if Fonterra will follow its lead.

Westland chief executive Rod Quin said the lower payout was because international prices for dairy products had fallen 10 per cent to 15 per cent below expected levels and this was compounded by a strong dollar.

He said the latest analysis showed it might be unwise to read too much into the United States reducing its milk production to help ease an over-supplied world market.

"There is no question it will be tough on the farm and the community. If we believe the marketplace will spike up we wouldn't have forecast this far down. While there are some positive signs from the United States, which is in a drought, the signals we are getting from that market is that it won't alter the availability of milk in a significant way."

He said the signs were more positive than if the United States had continued to push out more milk as it had the last few years.

Quin said a lot of milk remained in the pipeline and while demand was robust an oversupply position was likely to remain for the next three to four months.

"We have the view there will be some upward movement [in the payout], but the fundamentals are not to step up significantly and there may be some risks of downward movement."

This would be the case if China puts the brakes on its milk consumption.

Many farmers face farm costs of about 3.50/kg and then another $1.50 for debt servicing which is getting too close for comfort to the forecasted payout.

Westland appears also to be a casualty of changes to the Chinese colostrum market. This has flat-lined, chiefly from changes in China's food regulations insisting on the ingredient being removed from child nutrition formulas.

About 70 per cent of Westland farmers supply colostrum.

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- BusinessDay.co.nz

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