New Zealand’s Fonterra dairy co-operative cut the price it expects to pay farmers for milk to an eight-year low today, responding to tumbling global dairy prices as production soars and buying from China and Russia falls.

The world’s largest dairy exporter said it expected Chinese demand to rise at a slower pace than previously thought, as expansion of the country’s middle-class – a key market for milk, cheese and yoghurt – eases amid the country’s economic slowdown.

Fonterra slashed its farmgate price forecast to NZ$4.70 (RM12.54) per kilogramme of milk solids (kgms) for the current season starting in June, the lowest price since 2006/07 and sharply down from last year’s record-high of NZ$8.40.

The New Zealand dollar hit a session low of US$0.7664 after the announcement as dealers saw a negative impact from the forecast price cut on New Zealand’s terms of trade.

The dairy industry last year accounted for about a third of New Zealand’s economic growth and about a quarter of its exports.

“There is still considerable volatility in global dairy markets,” Fonterra chairman John Wilson said in a statement. “Right now we are seeing a number of factors that are delaying a sustained return to higher global prices.”

Analysts said a lower payout would knock more than NZ$6 billion from New Zealand’s $180 billion agriculture-based economy, while cutting farm incomes and raising concerns about rural debt.

“We expect farmers to rein in spending, in particular on things like feed, maintenance and capital spending and the like, and we expect to see some flow-through into spending in rural regions,” ASB Bank rural economist Nathan Penny said.

The latest payout forecast takes the farmgate price further below the average cost of production of about NZ$5.50/kgms. In response, signs are emerging that farmers are reining in production.

Global dairy prices have fallen around 50% this year, as stockpiled Chinese processors have slashed orders and Russia has banned European dairy imports in retaliation for sanctions over the Ukraine conflict, boosting global supply.

Fonterra said it saw demand growth in China rising by an annualised 4% through 2020, less than its long-held forecast for 7%.

Easing consumption growth reflected “factors including a slow-down in China’s economic growth which in turn affects the rate of urban migration,” Fonterra said in a statement.

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