NZ's Fonterra cuts dairy jobs as 'white gold' rush fizzles

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New Zealand dairy exporter Fonterra is cutting jobs in an effort to shore up its cash flows as a slump in global dairy demand, particularly from No. 1 buyer China, threatens to snuff out the country's "white gold rush".

Dairy prices have more than halved from record highs scaled in 2013, with Chinese buying dropping off dramatically after the world's second-biggest economy built up excess supplies of milk powder last year just as the economy began to slow.

Fonterra, the world's largest dairy exporter, has dominated the commodity milk powder sector for years and had been rapidly expanding its business in China.

Building a dairy empire in Vietnam
Building a dairy empire in Vietnam

But profits have been falling for nearly two years in the face of volatile dairy prices, which sank to a 12 1/2-year low at the latest global auction on Wednesday.

As a result, Fonterra said on Thursday it would cut more than 500 of its 16,000-strong global workforce, and warned more redundancies were likely as it reviews its operations.

New Zealand's dairy exports to China have tumbled 69 percent since the start of the year compared with 2014, official data shows, whittling Beijing's share of the country's total dairy shipments to roughly 16 percent, from 37 percent last year.

At the same time, a ban by Russia on foreign dairy products, imposed in response to sanctions slapped on the country over its role in the Ukraine conflict, has removed a major buyer of butter and other milk products.

Meanwhile, supply has ramped up as farmers in New Zealand, Europe and the United States have set up dairy farms in hopes of cashing in on a doubling in dairy prices between 2009 and 2013. Production in New Zealand, the world's biggest dairy exporter, has reached record highs.

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"It's really both sides of the equation. We had a period of really high milk prices, and that encouraged additional milk production across the globe," said Susan Kilsby, dairy analyst at agricultural consultants AgriHQ.

"There's been ... no reason to slow production anywhere as feed costs are low so there's still a lot of signals to encourage milk production. That's timed with the two largest buyers of dairy products buying less than usual."

Prices have more room to fall

Industry sources say Chinese processors are still working through stockpiles of imported milk powder, prized over domestic offerings due to past safety scares, which is used in everything from confectionary to baby formula.

That has kept Chinese buyers out of the market since the start of the year.

"The optimistic view is that there is 150,000 tonnes of powder sitting in warehouses," said David Mahon, managing director of Beijing-based Mahon China Investment Management, which focuses on China's food and beverage sectors. "I think it's well over 300,000 tonnes, but the mix is hard to know."

Such a stash would equal roughly half the volume of milk powder New Zealand exported to China in the whole of 2014.

Analysts see the risk of prices falling further, with demand unlikely to pick up soon as Chinese processors work through their existing stocks.

Adding to the expected glut, New Zealand's farmers are gearing up for the milking season beginning next month after the Southern Hemisphere winter.

"Often at this time of the year you see a faster increase in supply out of the Southern Hemisphere because supplies are tight, but we're certainly not seeing that this year," said Kilsby at AgriHQ. "There are certainly opportunities for prices to fall further."