Plunge in dairy prices casts cloud over New Zealand economy

New Zealand dairy giant Fonterra on Thursday slashed its forecast payout to farmers, sparking warnings that the country's economy was looking at a turbulent year ahead.

Fonterra Co-operative Group Ltd. cut its forecast payout to its farmers for the 2015-2016 season from 4.60 NZ dollars (2.96 U.S. dollars) per kilogram of milk solids to 4.15 NZ dollars (2.67 U.S. dollars).

"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," chairman John Wilson said in a statement.

"In addition, the Russian ban on European Union dairy imports continues to push more product on to the world market."

Although New Zealand farmers had responded by reducing supply, that had yet to happen in other regions, including Europe, where milk volumes continued to increase.

Chief executive Theo Spierings said Fonterra supported the general view that dairy prices would improve later this calendar year.

"It is important to state that despite the current challenges, we have 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," Spierings said in the statement.

Dairy New Zealand chief executive Tim Mackle said the reduced payout would affect cashflows and equity in the country's pillar export industry as the breakeven price for the average farmer was 5.40 NZ dollars (3.48 U.S. dollars) per kg of milk solids.

"The reduced milk price announcement today means our industry is facing a reduction in dairy revenues by around 800 million NZ dollars," Mackle said in a statement.

Milk production across the country to the end of December was down 2.6 percent on last season.

The value of dairy exports fell by 3 billion NZ dollars (1.93 billion U.S. dollars) to 11.5 billion NZ dollars (7.41 billion U.S. dollars) last year, the government's Statistics New Zealand agency said Thursday.

Despite the fall in value, the quantity of dairy export rose by 2.9 percent to a new record 2.9 million tonnes.

Opposition lawmakers said the government had to take urgent action to diversify the economy away from an over-reliance on dairy exports.

"The drop comes a day after Fitch ratings agency revised our near term growth prospects downward because of declining prices for dairy exports and on the same day the Reserve Bank said dairy prices remain a risk," finance spokesperson for the main opposition Labour Party, Grant Robertson, said in a statement.

The drop in the forecast payout threatened "an economic storm," New Zealand First party leader Winston Peters said in a statement.

"The whole nation will suffer from this further hit," said Peters. Endit