Confidence despite slump in dairy prices

Fonterra may be forced to slash its payout for this season unless dairy prices rebound from a two-year low, economists say.

But Federated Farmers says it is too early to panic over a six-month slump in which dairy prices have fallen 40 per cent since February.

Prices were down 8.4 per cent at the GlobalDairyTrade auction on Tuesday night, only a week after Fonterra cut its milk price farmer payout forecast by $1 a kilogram of milk solids to $6/kg.

The big slump was the second fall of more than 8 per cent in a row, three weeks after the previous auction which saw a shock 8.9 per cent decline.

It has prompted ASB to cut its milk price forecast by 40c to $5.80/kg, calling the reduction a "clear warning shot across farmers' bows".

"If prices stay near their current low levels for an extended period, the risk of a milk price closer to $5/kg for 2014/15 season is rising."

However, ASB says prices are likely to lift later in the year as supply tightens and Chinese dairy stockpiles clear.

ASB rural economist Nathan Penny said the fall in dairy prices needed to be kept in perspective.

"Compared to last year there'll be about $4 billion less income into the dairy sector, but that's coming off an amazing year," he said.

Westpac senior economist Anne Boniface also said there was a "clear risk" Fonterra's milk price payout could fall below $6/kg, which is what Westpac is still forecasting.

But Federated Farmers vice-chairman Andrew Hoggard said it was too early to panic and there were "signs of life" at the latest auction.

"Unless we have WW3 or a pandemic this isn't a ‘milk and disaster' sound bite. Memories seem to be short these days but there are no lakes of milk powder or mountains of butter anywhere."

Waikato University agribusiness Professor Jacqueline Rowarth said the fall in dairy prices had "huge implications" for the New Zealand economy.

She said the forecast milk price of $6/kg was about the average cost of producing milk, meaning many farmers would be barely breaking even.

Although a greater focus on value-added products could reduce the risks from dairy price swings, Rowarth said that would be costly in New Zealand, given the $14 an hour minimum wage.

Meanwhile, the Green Party has used the dairy price drop to criticise the Government's economic policies.

"A growing reliance on one or two commodity exports has made our economy more vulnerable to commodity price swings," Green Party co-leader Dr Russel Norman said.

"Producing increasing amounts of milk powder also has huge, downstream environmental impacts. We need to build a smart green economy with much lower carbon emissions and water pollution."