WELLINGTON: New Zealand dairy farmers are facing a further cut to this year's expected payout as rising supply, a strong currency and still weak demand will hamper a recovery in the sector, ANZ bank economists said on Tuesday.
The bank cut its forecast payout to farmers for the current 2014/15 season to NZ$4.35 a kilo of milk solids from its previous estimate of NZ$4.85/kg.
Global prices, which nearly halved last year, had shown some signs of finding a bottom in recent auctions run by the New Zealand based dairy giant Fonterra.
"A more modest recovery in dairy prices, combined with a strong New Zealand dollar is weighing on the outlook," ANZ rural economist Con Williams said in a note.
ANZ's projected payout compares with Fonterra's forecast of NZ$4.70/kg, which was the lowest price since 2006/07 and sharply down from last year's record-high of NZ$8.40.
Bank of New Zealand analysts said they too were pondering a cut to their current NZ$4.70/kg forecast.
The dairy industry accounted for about a quarter of New Zealand's export earnings in 2014, and the industry accounts for about 7 percent of New Zealand's $180 billion agricultural based economy.
A drop in the payout along the lines of the ANZ's forecast would be further below the average cost of production, adding pressure to heavily indebted farmers, and knocking close to NZ$7 billion off the economy.
Prices tumbled through last year under pressure from growing global production, increased supply because of Russia's ban on imports in retaliation for Western sanctions over the Ukraine conflict, and reduced demand in the key Chinese market because of large stockpiles.
The strength of the New Zealand dollar, which hit a three-year high against the US dollar last July, has also weighed on returns to farmers.
The kiwi has fallen about 11.8 percent since that peak, but the decline has done little to cushion the impact of the slide in prices.
ANZ also lowered its preliminary forecast payout for the 2015/16 season, which starts in June, to NZ$5.75/kg from its previous NZ$6.50/kg.
"At this stage we suspect the recovery will be gradual through the first half of 2015 and gather more momentum in the second half of the year," Williams said.
Fonterra's latest dairy auction is due later on Tuesday.
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