ANZ New Zealand economists lowered their forecast for Fonterra Co-operative Group's [NZX: FCG] 2015 milk payout to farmers, reflecting the continued slide as dairy prices and a kiwi dollar near three-year highs.
Fonterra may cut its 2015 forecast farmgate payout to $6.25 per kilogram of milk solids from the opening $7 kg/MS forecast it announced in June, ANZ economists said in note. That would equate to a $3 billion slump in dairy incomes from a record 2014 payout, which is expected to be $8.40 kg/MS. The bank expects Fonterra will update its forecasts later this month when it provides the 2015 dividend outlook.
ANZ's downgrade comes after the ninth decline in trade-weighted dairy prices out of the last 10 GlobalDairyTrade auctions, with prices at the lowest level since January last year.
"Continued strength in the NZD, large falls in international dairy commodity prices, and recent price action (which we consider to be bearish) have prompted us to downgrade our 2014/15 milk price forecast," ANZ economists said. "Fonterra seems to have responded to this by reducing the volume on offer over the next four months, but this hasn't been enough to stabilise prices."
The kiwi recently traded at 87.51 US cents, having climbed as high as 87.91 cents overnight.
ANZ economists said dairy prices are lower and the kiwi stronger than what the Reserve Bank had been expecting, though the combination wasn't enough to warrant a change in monetary policy expectations.
"A hike in July still looks odds-on, though we don't consider it the sure-fire bet that the market is currently pricing in," they said. Traders have priced in an 88 percent chance of a rate hike at this month's review, according to the Overnight Index Swap curve.
Separately, the Rabobank Rural Confidence survey released today showed lower optimism among local dairy farmers due to rising interest rates. a strong exchange rate, and falling global milk prices.
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