NZ farmers tighten tap on milk production as prices plunge

Farmers in New Zealand, the world's largest dairy exporter, are reining in milk production as a flood of supply from Europe and the United States pummels prices, a sign the "white gold" rush that has fuelled the New Zealand economy for years is over.

Last season's record-high prices have fallen well out of reach as the supply glut and a slowdown in buying from China and Russia batter New Zealand's largest export industry.

New Zealand dairy cooperative Fonterra Cooperative Group - the world's biggest dairy processor - is expected to cut its farmgate milk price forecast on Wednesday to a six-year low of less than NZ$5.00/kg of milk solids, from NZ$5.30 currently.

In a huge blow to farmers, economists expect the new price to fall well below the average cost of production and will knock around NZ$5.5 billion ($4.20 billion) from New Zealand's $180 billion agriculture-based economy.

"What we're going to see is quite weak trade numbers over the next 6 months or so as the price fall to date comes through the official data, and that will show up in the current account and the terms of trade," BNZ economist Doug Steel said.

Steel said however that it was too early to detect a fall in annualised production.

Lower output may mark the end of a six-year, China-driven boom during which both prices and production hit record highs. The dairy industry last year accounted for about a third of New Zealand's economic growth and about a quarter of its exports.

Farmer Willem Stolte says production at the farm he runs with his son Clarence near Wellington has fallen 8 percent so far this season, starting in June, as they milk fewer cows.

"All the signs were there that Europe was booming, that the U.S. was booming. We knew things wouldn't be as good as last year," Stolte said.

"We decided that milking less, we'd have less stress, because we knew we wouldn't get NZ$8.40 (per kg) ... by the looks of it that was a prudent move."

Dairy Companies Association of New Zealand data shows milk production rose 4.6 percent on the year through the seasonal peak in October, due in part to good weather.

Farmers also ramped up supply as global dairy prices surged through 2013, after a fatal infant formula poisoning scandal in China in 2008 resulted in ballooning demand for imported milk powder, a key ingredient in milk formula.

But having stockpiled last year, Chinese processors have slowed their buying spree, slicing global prices by half since the start of 2014.

Fonterra last month cut its outlook for dairy consumption in China, its biggest export market, to 4 percent annual growth through 2020, from 7 percent.

Meanwhile, a Russian ban on dairy imports from Europe in retaliation for global sanctions over the Ukraine conflict is raising supply, as European producers divert sales to other markets.


New Zealand supply is now expected to fall in coming months as cash-strapped farmers cut back on supplementary feed for their grass-fed cows.

"Tighter on-farm cashflows will mean that over the summer - regardless of weather - we will see more traditional New Zealand farm management practices prevail," Fonterra Chairman John Wilson told shareholders last month.

"That means reduced use of feed supplements, and increased culling, which will result in a slowdown, if not a decline, in the growth we have experienced over the past two years."

Smaller processors have already noticed signs of easing production.

"We're starting to see the daily averages start to go under last year," Westland Milk Products CEO Rod Quin said.

Figures from agriculture intelligence firm AgriHQ show a steep drop in prices for palm kernel, a supplementary feed.

"That's been driven by the lower milk price," AgriHQ dairy analyst Susan Kilsby said. ($1 = 1.3098 New Zealand dollars) (Editing by Lincoln Feast and Stephen Coates)