Dairy payout cuts fuel concerns for New Zealand economic growth

Dairy giant Fonterra announced Wednesday it is looking to slash payouts to New Zealand's pillar dairy farming sector on the back of weakening global demand, prompting concerns over New Zealand's economic growth.

Fonterra Co-operative Group Ltd. cut its forecast farmgate milk price for the 2014-2015 season from 6 NZ dollars (4.84 U.S. dollars) to 5.30 NZ dollars (4.28 U.S. dollars) per kilogram of milk solids.

Chairman John Wilson said the lower forecast reflected continuing volatility, with the Fonterra's GlobalDairyTrade price index falling 6 percent in the past two fortnightly auctions.

"The market is currently influenced by strong milk production globally, the impact of Russia's ban on the importation of dairy products, and the levels of inventory in China. Some relief has been provided by exchange rates, with the New Zealand dollar recently showing some signs of falling against the U.S. dollar," Wilson said in a statement.

"Under the current market conditions, there is further downside risk. However, the forecast reflects expectations that prices will increase in the medium term," Wilson said.

The Fonterra forecast follows a similar announcement last week from Synlait, which is 40-percent owned by China's Bright Dairy, and the Federated Farmers industry group said it was "really going to hurt."

"The 2014-2015 season which offered so much has turned into a break-even one for not just Fonterra suppliers, but the entire industry," Federated Farmers dairy chairperson Andrew Hoggard said in a statement.

"It means that upwards of a quarter of our guys will be making a loss this season," said Hoggard.

Opposition parties said the news highlighted the need to move New Zealand away from its economic reliance on the pillar dairy industry.

The New Zealand First party said the cut in the forecast amounted to a loss of 5 billion NZ dollars (4.03 billion U.S. dollars) to the New Zealand economy and 2 percent off nominal GDP.

"The plunge will have huge repercussions in the regions - when the farmer is worse off spending dries up and rural businesses and towns are the first to feel the pinch," New Zealand First leader Winston Peters said in a statement.

Statistics New Zealand announced Wednesday that milk powder, butter and cheese exports to China fell 35 percent year on year in August, although China remained the top destination for dairy products, taking 14 percent of the total.

Federated Farmers maintains the falling prices was due to an unusually good global production season in the first half of 2014, which put an extra 7 billion liters of internationally traded milk on to the market, but analysts say the Russian import ban and softening demand in China meant that prices are unlikely to lift until next year.

Goldman Sachs reportedly forecast earlier this year that annual global dairy output would exceed demand by 2 billion liters through to 2018 a five-year glut that would depress prices.