The outlook for the dairy market is concerning, although payouts would hold at forecast levels in the short-term, New Zealand dairy processor Fonterra Cooperative Group said on Wednesday.
"Fonterra had a good first quarter. We continue to forecast a payout of around NZ$5.20/kg of milksolids for this season, but the longer-term outlook is of real concern," Fonterra chairman John Roadley said in a newsletter to the company's farmer shareholders.
New Zealand's largest company, Fonterra is a major economic force in the country, accounting for over 20 per cent of exports and around seven per cent of GDP.
While ownership is restricted to dairy farmers, NZ$200 million in perpetual notes are to be listed on the NZ Stock Exchange on December 3.
High product prices has seen the number of dairy farms rise in New Zealand and the company said it had processed a record volume of milk over the past month, at over 66 million litres a day.
However Fonterra warned that the trend of a soft worldwide market for its milk products was continuing, with weakened demand due to an uncertain world political and economic situation.
"It is now clear that a significant market adjustment is in progress which will be reflected in a realignment of prices from the good levels which have prevailed for the past two years," Fonterra said in the newsletter.
Milk powder had been hardest hit, which the company blamed on issues such as a steep drop in demand in Brazil and uncertainty around the United Nations supervised oil-for-food arrangement in Iraq.
"Of concern now is the possibility that the European Union and the United States will reintroduce export subsidies with the objective of lifting their sales rates," the company said.
Markets for casein and other protein products were reflecting the weakened demand for skim milk powder but the butter market was less affected.
Fonterra was formed through the merger of New Zealand's two major processors, NZ Dairy Group and Kiwi Cooperative Dairies, and their jointly owned export agency the NZ Dairy Board.
NZ Dairy Group and Kiwi paid out NZ$5.00 per kg of milksolids for the 2000/01 season.
ASB Bank, in a weekly commodities report, noted that the CBA USD dairy index had fallen nine percent since August, and this pointed to a lower payout for the 2002/03 season.