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Weak dairy prices will last until the second half of 2016

January 27, 2016

New Zealand dairy processor Westland Milk Products say current weak milk prices will last until the second half of the year.

Westland cut their forecast of its payout to producers in 2015-16 from NZ$4.90-5.30 per kilogram of milk solids to NZ$4.15-4.45. This reduction followed price cuts by rival Open Country Dairy (OCC), with the co-operative stating it’s downgrade ‘reflects Westland’s view of what the market will deliver’, foreseeing no revival in values in the near future. OCC’s current forecast is NZ$4-4.30.

Growing output in the EU, where farmers are being ‘overpaid’ by dairy groups, and the US are being blamed for the continuing low prices, while Chinese dairy demand has remained ‘steady’. It was China’s reliance on inventories and step back from orders that fuelled the original slump in world prices last year.

Output in the EU soared by 5% in November, amid a continued increase in volumes following the dissolution of production quotes in April. This reform has seen a surge in outputs in countries such as Belgium and Ireland, where climate is perfect for pasture growth and hence, cattle grazing, in what has been termed a ‘land grab’ by processors wanting to maximise share in these expanded markets.

As farmers adapt to the removal of quotas and find a new sustainable farm gate price, this has seen EU producers receive above-average market prices for milk. This has kept EU milk production higher than expected.

In the US, milk production has been forecast to drop with official data from Dairy Management and the National Milk Producers Federation ‘show that the annual rates of change in milk production has been trending down throughout this year. This suggests that growth in production will continue to decline.’

Despite the ongoing weakness in dairy, New Zealand land prices have continued to rise according to the Real Estate Institute of New Zealand. The institute’s all-farm index have risen by 4.1% since December 2014 with the average sales price currently sitting at NZ$28,781 per hectare.

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