No milk price drop expected

TOM PULLAR-STRECKER
Last updated 17:11 28/05/2014

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Fonterra signals $2.2b dairy payout cut

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The cost of producing a litre of milk should fall by about 10 cents as a result of a drop in Fonterra's forecast payout to farmers.

However, the dairy co-operative is dampening expectations consumers will see a price drop at the supermarket.

Fonterra announced today that it expected the farm-gate price of milksolids would drop to $7 a kilogram in the year to June 2015. It also revised the payout for this season down from $8.65 to $8.40 a kilo.

Fonterra said that would mean the value of the milksolids in a litre of Anchor Blue milk would fall to 49 cents next year.

A litre of the blue-top milk contains 33 grams each of milk fat and protein, which would cost $4.45 and $10.35 per kilo respectively, it said.

Fonterra chief financial officer Lukas Paravicini said it could be assumed the cost drop would be reflected in retail prices "at some stage".

He qualified that by saying this year's increase in the price of milksolids, which peaked in February, had been absorbed by suppliers rather than passed on to consumers.

Fonterra Brands New Zealand managing director Peter McClure said he would "not expect to see much change at the shelf".

The dairy giant couldn't recover the previous cost rise because of what the market would bear, he said.

"Consumers and retailers have pushed back pretty hard," McClure said.

"We have taken a reasonable hit this year."

Other major components of the price of milk include production and distribution costs, retail margins and GST. The cheapest milk at Countdown today costs $1.78 a litre, in a three-litre bottle.

The bigger impact on consumers from Fonterra's reduced payouts may be the flow-on effects from the $2.2 billion cut to farmers' forecast income and the corresponding reduction in export earnings.

However, even under Fonterra's new forecasts, the price of milksolids remains near a historical high.

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