Cheese Price Might Fall but Not Milk

By WOOD, Alan

Cheese and butter supermarket prices might ease a little after Fonterra cut its forecast milksolid payout but milk prices will stay around existing levels, to the frustration of consumers.

Fonterra, which has just taken a $139 million hit on the value of its contaminated San Lu milk business in China, has reduced its predicted payout for 2008/09 to $6.60 a kilogram of milk solids, down from an earlier forecast of $7.

That forecast payout is lower than expectations and will prick the price bubble for rural land.

It will also reduce the economic ballast that country spending is providing New Zealand at a time of world economic uncertainty.

It is the first time Fonterra had downgraded its forecast since the cooperative was formed in 2001.

But the drop – driven by a 40% to 50% reduction in some dairy commodities – will not flow into the plastic bottle of milk that is a staple for Kiwi families, market commentators say.

Farming specialist Professor Keith Woodford of Lincoln University said there might be some reduction in cheese, butter and milk powder prices, but not for milk which was sold on slim margins by Fonterra and other manufacturers.

“We could hope to see some small decrease in cheese (and possibly butter) but we’re unlikely to see much of decrease in milk.

“In my opinion, the margins on milk have been reasonably slim in the last year,” Woodford said.

Fonterra yesterday announced a record breaking final payout of $7.90 a kilogram of milk solids for the 2007/08 season, though its board somewhat controversially decided to retain 24c of that within the cooperative.

Westpac senior economist Doug Steel said the 2008/09 $6.60 forecast was about 10c lower than expected.

This would likely only lessen the trend for milk prices to rise in supermarkets, he said.

“Milk prices probably haven’t lifted as far as the increases we’ve seen on world markets in terms of (other) product prices,” Steel said.

While the forecast was below previous years’ average payouts of about $4.40, “it will certainly take (away) a little bit of the optimism that was pretty widespread across the industry.

“I think it will also take a little bit of the wind out of the sails for the (rural) property market which has been driven a lot by the expansion of dairy, but also cropping which has been going very well.”

While the SanLu saga in China was not helping the cooperative at all, the big story was the reduction in forecast payout following a plunge in world prices with milk powder off 40% or more from its peak.

Rabobank senior analyst Hayley Moynihan said the supermarket market price for milk was based on a number of factors including negotiations between processors and retailers, but any falls would not be substantial.

Federated Farmers’ dairy chairman Lachlan McKenzie said Fonterra’s lower than expected forecast of $6.60 would negatively impact farmers. They were already battling sharply increased farm costs, high interest rates and lower-than- expected advanced payouts for the 2008/09 season.

This was reducing the cash spend in provincial communities.

Federated Farmers was calling for quick action by the Reserve Bank to avoid a hard economic landing.

It wants the official cash rate cut by one per centage point in the short term.

(c) 2008 Press, The; Christchurch, New Zealand. Provided by ProQuest LLC. All rights Reserved.