The boom time of agriculture is coming to an end in New Zealand.

Fonterra, the giant dairy co-op there, earlier this week told dairy producers about the lower prices coming their way.

The co-op reduced its forecast for the price it will pay for milk solids for the 2002-03 marketing season which extends through next May. The price was dropped from $4 per kilogram of milk solids to $3.70 per kilogram of milk solids. That equates to a payout reduction of $334 million. For a dairy milking 251 cows that drop in pay price equates to a decrease in income of about $40,000.

In addition, the Ministry of Agriculture and Forestry reported that ag income is deteriorating in all farm sectors. It predicts an average farm revenue drop of 19 percent this year. And although the drop in income will be felt first in rural towns, it will eventually spread to the entire economy.

Dairy Farmers of New Zealand president Kevin Wooding told The New Zealand Herald that the impact would be dramatic in small towns. Established producers have been through the ups and downs of the dairy market before. "What concerns us is how the share milkers, the new farmers, and anyone who has increased the size of their holdings over the last few years is going to cope."

Fonterra said that although their forecast of $4 was made just a couple of months ago it assumed a recovery in commodity prices toward the end of the year and an exchange rate of 45NZc to the U.S. dollar. However, in the past two months the exchange rate has continued to rise. And, the European Commission last week announced an increase in restitution payments used to subsidize dairy exports. Those two things have forced international prices down and resulted in the co-op reducing their price projection to $3.70 per kilogram of milk solids.

This is the second estimate reduction for Fonterra this year. In February it forecast payout at $4.50 per kilogram of milk solids, then in May reduced that projection to $4 due to global market trends.

The New Zealand Herald