Independent dairy co-operative Westland Milk Products says it will cut its 2012-13 payout forecast due to a fall in international prices for dairy products, raising the possibility that Fonterra may follow suit.
Westland said it would cut its budgeted $5.70 - $6.10 per kilogram of milk solids (kgMS) to $5 - $5.40 per kg for 2012-13.
Chief executive Rod Quin said the reduction was due to international prices for dairy products being 10 to 15 per cent below expected levels.
"This is compounded by the ongoing high rate of the New Zealand dollar, at around 80 cents against the US dollar, which results in fewer New Zealand dollars available for pay-out," Quin said in a statement.
Westland Milk Products is the biggest dairy co-operative in New Zealand next to Fonterra, with farmer shareholders on the West Coast and in Canterbury. Westland processes 600 million litres of milk a year and has an annual turnover of $525 million.
Market insiders regard Westland as a bellwether for Fonterra, so today's move will add weight to the view that Fonterra will also have to lower its payout forecast for 2012-13.
Bank of New Zealand rural economist Doug Steel said Westland's move was a sign of the times, reflecting generally lower product prices and a strong currency.
Commenting on Fonterra's forecast, Steel said: "We have been of the view that international prices need to go higher from where they are for Fonterra to meet its forecast, or the currency needs to come down - and that's still our view."
Dairy product prices showed signs of stabilising at Thursday's fortnightly dairy auction, but the strength of the New Zealand dollar is clouding the outlook for Fonterra's payout.
Fonterra, which collects around 89 per cent of New Zealand's milk production, announced a payout for 2012-13 of $5.95 to $6.05 a kg.
Quin said the reduced payout by Westland would have an impact on rural communities, with farmers bearing the brunt, but he said the co-operative was in good shape.
"This situation highlights the importance of our strategy of moving significant milk volumes away from the commodity markets into specialist nutritional products, which will give us better returns and greater stability," Quin said.
The nutritional products market is growing and we are taking advantage of that to the ultimate benefit of shareholders, he said.
Quin says the colostrum market was in the doldrums due to an oversupply from the United States and changes in food regulations in China.
Most of Westland's colostrum is sold to China into the child nutrition segment of the market.
But Chinese authorities had recently regulated against the addition of colostrum to child nutritional products, which had led to a significant reduction in demand.
"As a result there needs to be a reduction in the collection period this season and there will also be reduced payments for the colostrum we do collect," he said.
Quin said the colostrum the market was likely to remain volatile "for the foreseeable future".
Colostrum - a form of milk produced by the mammary glands of mammals - contains antibodies to protect the newborn against disease.
Quin said there were encouraging signs that dairy prices overall would firm, with the Thursday's GDT price index increasing by 3.5 per cent over the previous sale.
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