Fonterra cuts milk price forecast; US subsidies to hurt world market

Fonterra Cooperative Group Ltd., the world's largest dairy exporter, has reduced its milk price forecast by 12 percent, and said the US decision to resume export subsidies may slow recoveries in world markets.

Fonterra may pay suppliers NZ$4.55 (US$2.83) for each kg of milk solids supplied in the year ending May 31, 2010. The lower-than-expected forecast is the lowest since 2006 and will cut farm incomes by about NZ$830 million (US$515 million) based on current production.

Many farmers struggled in the past on a NZ$5.20 (US$3.23) payout thus if the new forecast comes to pass the farmers will struggle even more, said Brendan O'Donovan, chief economist at Westpac Banking Corp.

The biggest reason behind the lower forecast is the 23-percent increase in the New Zealand dollar over the past two months, Fonterra chairman Henry van der Heyden said.

The forecast assumes the currency will average 59 cents and there is as much downside risk as upside, he said.

Rising stockpiles in Europe and North America are pressurising prices while renewed US export subsidies may prompt US farmers to increase shipments. International prices will not increase until the stockpiles are cleared, and the US subsidies will hurt New Zealand farmers, said Van der Heyden.

World dairy prices have dropped about 55 percent the past 18 months after the global recession slashed demand for dairy products and production increased in Europe and the US.

Output for the current season is likely to reach 1.28 billion kg of milk solids, up 7.5 percent from last year's drought-reduced output. Fonterra will not estimate next season's production until July.