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Treasury shows how lower prices will flow through to farms and reveals how much and when the farms will receive the funds

Rural News
Treasury shows how lower prices will flow through to farms and reveals how much and when the farms will receive the funds

Treasury has reviewed the impact of the dairy price fall in its May Monthly Economic Indicator bulletin.

This reveals the size of the change in expected payments to dairy farmers who supply Fonterra.

The following is from page 5 of their Review:

"The GlobalDairyTrade (GDT) Price Index fell 2.2% in the second auction for May.

"Average GDT prices are now down 26.7% from their recent peak in early March 2015, which will dampen dairy export values over coming months.

"Moreover, the 10.0% decline in average GDT prices since the BEFU forecasts were finalised presents some downside risk to the outlook for export commodity prices.

"Scenario one in the Risks and Scenarios chapter of the BEFU canvasses the implications of weaker export commodity prices on the terms of trade, GDP and the fiscal position.

"Fonterra announced on 28 May an opening farm gate milk price of $5.25/kg of milk solids (ms) for the 2015/16 season, reflecting recent auction results and the overall weak outlook for dairy markets in the near term.

"This was in line with Treasury and market expectations, with bank analysts expecting the price to increase to $5.50- 5.70/kg ms by the end of the season.

"At the same time the 2014/15 season was revised down further to $4.40/kg ms with the forecast dividend unchanged at 20-30 cents.

"While the 2015/16 milk price has increased from last season, farm revenues will be lower next season due to the smaller retrospective payments.

"The impact on farm revenues will be particularly pronounced in July and August and farm cash flows will be tight throughout the season.

"Previous declines in global dairy prices led to a 7.4% fall in the ANZ World Commodity Price Index for April, partially offset by price increases for meat (beef in particular), wool, pelts and apples. However, the high NZ dollar remained a constraint, with commodity prices in the NZD index falling some 8.9%.

"The NZ dollar TWI is currently lower than assumed in the BEFU forecasts. If sustained, the recent fall will help to offset the decline in commodity prices while also supporting other parts of the tradable sector."

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