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Last updated on April 18, 2014 at 12:48 EDT

Dairy Payouts Tipped to Dwindle

September 11, 2008

By WOOD, Alan

INVESTORS have had second thoughts on entering the dairy sector, given a sudden plunge in global whole milk dairy prices.

With whole milk powder prices retreating significantly in the past couple of months, market participants are saying demand for rural land suitable for dairy is lessening and linking it to new production investment.

Global Dairy Network director John Shaskey said the latest price being paid for whole milk powder was about US$3000 a metric tonne, a significant retreat from recent peaks.

One set of University of Wisconsin data showed whole milk prices peaking at more than US$5800 about a year ago.

“In the last two months they’ve dropped by about US$1500 . . . Demand has really softened in key markets, in developing markets,” Mr Shaskey said.

There were also now expectations of “a pretty normal supply year” from Oceania markets, including Australia and New Zealand, where Fonterra was expecting about 10 per cent more production compared with last year’s drought-ravaged supply.

Mr Shaskey, whose company trades and exports on behalf of New Zealand and overseas producers, said the Kiwi dollar would need to retreat even further from its existing levels of US66c-US68c to support Fonterra’s payout plans.

Another industry insider said the price falls had created uncertainty in terms of investment in land and the development of infrastructure for processing milk. “This will have an impact on the payout price by Fonterra– the banks are talking somewhere between $5.50 and $5.80 (a kilo of milk solids).”

In May, Fonterra increased the farmer payout to a record $7.90 for the 2007-08 season, and announced an initial forecast for 2008- 09 of $7 a kilo. “This is certainly affecting the economics of people who are looking to enter the dairy industry, and those who have bought land at high prices with an expectation that the high payout prices will continue,” the industry insider said.

Financial players who knew the dairy sector well and knew that demand would continue were now in a wait-and-watch mode, the insider said.

Mr Shaskey said that in the longer term there could be a significant realignment of high land prices, given retreating commodity prices and the probability of more overseas supply coming into the market.

But the creation of new processing facilities and land conversion would probably continue, given prices were above historic levels.

“People need to be cautious around their numbers, and not budget on $7 (a kilo) plus payouts . . . because they’re not the norm.”

Another view in the market was that a US dairy herd expansion had driven up supply but that now some of those farmers were leaving the business — a positive for New Zealand producers.

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(c) 2008 Dominion Post. Provided by ProQuest LLC. All rights Reserved.