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New Zealand dairy payout threatens production, debt levels

May 12 New Zealand’s farmgate milk prices are likely to be weaker than previously expected in the next year, raising the risk that cash-strapped farmers will be forced to curb production and take on more debt.

Dairy products make up more than a quarter of New Zealand’s total exports and the industry accounts for around 10 percent of total borrowing in the country.

Coupled with this year’s eight-year low payout, a below-average payout in the 12 months to June 2016 could weigh on economic growth just as speculation has increased about a possible interest rate cut as early as June.

Banks and dairy analysts now expect that co-operative Fonterra, the world’s top dairy exporter, will pay its farmer shareholders NZ$5.60-NZ$5.70/kg milk solids next year.

While better than this year’s eight-year low of NZ$4.50, it marks a cut in the earlier median forecast of four banks and analysts of NZ$6.14.

“There’s plenty of milk around and that’s been the case for a while, but we have expected Chinese demand would pick up and that’s been weaker for longer than expected,” said Nathan Penny, a rural economist at ASB Bank, which cut its forecast to NZ$5.70 next season from NZ$6.20.

Policy makers have been keeping a close eye on the dairy payout and the Reserve Bank of New Zealand in its March monetary policy statement said a fall could result in a sharper slowdown in spending and economic activity.

The central bank, which has also warned that indebted farmers could face financial stress from a weaker payout, releases its biannual report on financial stability on Wednesday.

Increased global production, sluggish buying from China, the world’s No. 1 buyer of whole milk powder, and Russian dairy import bans have knocked dairy prices towards a six-year low, global auction results showed last week.

Other analysts acknowledged downside risks to their payout forecasts.

“If global prices don’t improve, we may not get to our forecast of NZ$5.70 for the next season,” AgriHQ dairy analyst Susan Kilsby said.

A payout around NZ$5.70 would be lower than a long-term average around NZ$6.50, and risk curbing growth in milk production.

“They may look to offload stock to get that extra bit of cash, along with buying less feed, fertiliser, or deferring other investments, and that would translate into less milk,” said Penny at ASB.

He added that he anticipated annual production growth of 1-2 percent next season, below the average trend growth of 3 percent.

Source: Reuters

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