New Zealand's Fonterra Co-operative Group said on Thursday it will cut the price it pays Australian dairy farmers for their milk, following a similar move by rival Murray Goulburn amid a fall-off in demand from China.
Fonterra, the world's largest dairy exporter, said it would reduce its forecast Australian farmgate milk price this season to A$5 per kg of milk solids from A$5.60 per kg, but would offer farmers loans of up to $0.60 per kg, repayable from 2018.
Global dairy prices have fallen around 60 percent since early 2014, mainly due to weaker demand from China after it stockpiled milk powder, and most analysts expect milk prices to stay low for some time.
"The price change better reflects the reality of the supply and demand imbalance that is affecting global dairy commodity prices, compounded by the recent strength of the Australian dollar," Fonterra said in a statement.
Fonterra, which operates 10 factories in Australia that account for nearly a tenth of its total milk processing, said it was maintaining its current earnings guidance range for the year to end-September 2016 of NZ$0.45 to NZ$0.55 per share.
Australia's biggest dairy producer Murray Goulburn Co-operative Co Ltd last week slashed its full-year net profit foreast and cut its forecast farm gate price to between A$4.75 and A$5.00 a kg from A$5.60 per kilogram previously, blaming weaker-than-expected sales to China.
The maker of Devondale milk and butter also said it would provide financial assistance to farmers resulting in charges of up to A$165 million.
Fonterra's move would be "devastating news" for Australia's dairy industry following a a very challenging season, said Simone Jolliffe, president of industry group Australian Dairy Farmers.
"We have concerns around the requirement that farmers will be carrying debt into the coming year," she added.