November 24, 2008

Slowing world growth and declining consumer confidence may hinder any recovery in demand for dairy products before mid-2009, said Fonterra Cooperative Group Ltd.

The company, which accounts for about 40 percent of the international dairy trade, reduced its forecast payout for New Zealand farmers, citing a sharp drop in demand in the past two months.

Fonterra said the financial crisis is getting worse and prices are likely to fall further.

World prices for dairy products have dropped about 42 percent from last year, as the slowing global economy capped demand for commodities and output in the US and the EU increased.

Consumers are tightening their wallets and the situation won't improve until confidence returns to the consumer and when retail prices start to fall, according to Kevin Wickham, managing director of Fonterra's GlobalTrade unit.

Growth in the company's main export markets is expected to slow to about 1.6 percent this year from 4.9 percent last year, said Goldman Sachs JBWere Ltd. economist Shamubeel Eaqub.

A drop in consumer spending has left retailers high-priced inventory that may take until early next year to clear, said Wickham.

Wickham said low prices are slowing farm production in the US and the EU, but stockpiles there and fresh output from New Zealand, Australia and Latin America may leave markets out of balance for the "better part of 2009".

Fonterra's output this year will likely increased 5 percent from last year, Wickham said.

Fonterra accounts for about 95 percent of New Zealand's milk production most of which is exported. About 7 percent of world dairy production is traded across borders.