Western-style breakfast is on the rise in China with Fonterra saying rising incomes and a growing middle class in China are fuelling demand for items such as butter, cream and cheese.
On January 28, Fonterra reduced its forecast Farmgate Milk Price for the 2015/16 season from NZ$4.60/kgMS to NZ$4.15/kgMS – about $1.25 less than the average break even cost of production of NZ$5.40.
The January 28 announcement came as Westland Milk Products and Open Country Dairy also reduced their payout forecasts.
DairyNZ said the changes would mean NZ $67,000 less in cash revenue for the average farm producing 150,000kgMS – or NZ$800 million across the sector.
Fonterra chairman John Wilson said global economic conditions continued to be challenging and were impacting demand for a range of commodities, including dairy.
“Key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China,” Mr Wilson said.
“In addition, the Russian ban on European Union dairy imports continues to push more product on to the world market.”
Mr Wilson said there was still an imbalance between supply and demand which continued to put pressure on global milk prices.
Since last September, prices on GlobalDairyTrade for Whole Milk Powder (WMP) have fallen 12%, and Skim Milk Powder (SMP) prices are down 8%.
“Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase,” he said.
Chief executive Theo Spierings said while global demand remained sluggish, Fonterra supported the general view that dairy prices will improve later this calendar year.
“However, the time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices,” Mr Spierings said.
“These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.”
He said despite the current challenges, the co-op had confidence long-term international dairy demand will continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.
Mr Wilson acknowledged the reduction in the forecast farm gate milk price would be “very tough on our farmers”.
“As we confirm the co-op’s performance for the first half of the financial year, we will look at the best way to help our farmers’ cash flows, underpinned by the expected improvement in dividend returns and the financial strength of the co-operative.”
Millk production across NZ to the end of December was down 2.6%, with some regions dropping production by up to 9%.
Fonterra Shareholders Council chairman Duncan Coull said the drop was a sobering blow.
"Looking forward, our farmers will be expecting our co-operative model, which sees shareholders benefit from milk price and the value-add side of the business, to deliver for them in terms of the total available for payout.”
In the interim, he encouraged farmers to seek guidance and support on how to best navigate through the tough times.
Dairy NZ chief executive Tim Mackle said tough decisions were being made.
"Farmers will be working extremely hard in their businesses and that can affect health and wellbeing. Many will have to pick up extra work on their farms. Some will be looking for off-farm income opportunities. They will be looking at all their options and banks will be joining in those conversations," he said.
Mr Mackle said although most farmers had already done all they can to reduce costs, DairyNZ would be working with farmers to focus on “tight and skilled pasture management”.
"Pasture is still the cheapest feed to produce and our ability to grow pasture year round is our competitive advantage as a country. We will be working with farmers to get the best out of their farming system and change it if they need to do that.”
He said the positive note for NZ dairy farmers was that home grown feed levels were good over summer.
“El Nino has not been as severe so far as some predicted. Some reasonable rain in December and January has bolstered pasture and crop growth."