Westland Milk Products, the Hokitika-based dairy cooperative, has followed Fonterra Co-operative Group [NZX: FCG] in cutting its forecast payout for the 2015 season, citing weaker global dairy prices and high New Zealand dollar.
Westland, the nation's second-largest dairy cooperative after Fonterra, is forecasting a payout of $6 to $6.40 a kilogram of milk solids before retentions, it said in a statement. That's down from $7.50 to $7.70 per kg/MS it expects to pay for the 2014 season.
"The market has continued to decline as customers limit their purchases due to higher inventories in their supply chains, and growth in milk and dairy product supply from Europe and the US," chief executive Rod Quin said.
The New Zealand dollar fell below 85 US cents for the first time in seven weeks after Fonterra cut its 2015 farmgate milk payout forecast to $6 kg/MS yesterday. It fell as low as 84.90 cents, the lowest since early June. Still, Westland's Quin said the currency hasn't fallen enough to make up for the decline in dairy prices.
"To date, the decline in the dollar has been very small and the currency remains overvalued," he said.
Westland is lifting production of higher-margin products such as infant formula to reduce its reliance on bulk dairy commodities so that it is less vulnerable to swings in the commodity cycle, he said.
Prices of dairy products reached the lowest level since December 2012 in the latest GlobalDairyTrade auction. Elevated dairy prices propelled New Zealand's terms of trade to a 40-year high in the first quarter of this year, providing a major impetus to the nation's growth, though economists say trade has probably peaked given the subsequent decline in prices of milk powder exports.
Exports of milk powder, butter and cheese make up 31 percent of New Zealand's total overseas shipments, based on government figures for the 12 months ended May 31, and surged 36 percent in that year. Dairy exports are almost three times more valuable than meat, the next-biggest commodity New Zealand sells to the world.
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