The dairy commodity prices discussed over the last few weeks are beginning to filter into milk prices to farmers.

Dutch spot prices dropped slightly to 18.5c/litre. On Monday, New Zealand’s (NZ) main processor Fonterra reduced its forecast farmgate milk price for the 2015/16 season from $4.15/kg MS to $3.90/kg MS (effectively 17.9c/litre at Irish solids converted at $1.62:€1).

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When combined with the forecast earnings per share range of $0.45 to $0.55, this means a total forecast available for payout of $4.35/kg to $4.45/kg MS (20.5c/l) and would currently equate to a forecast cash payout of $4.25/kg to $4.30/kg MS (19.8c/l) for a fully shared-up farmer after retentions.

Fonterra is forecasting its NZ milk production to be at least 4% lower than last season as farmers there respond to the ongoing low milk prices by reducing herd sizes and feeding significantly less purchased feed. It is expected that this reduced supply will have an impact on this autumn’s production in NZ.

In explaining the lower forecast price, Fonterra chair John Wilson said difficult conditions in the globally traded dairy market have put further pressure on the forecast.

“This further reduction in the forecast farmgate milk price is the last thing farmers want to hear in what is proving to be a very challenging season. At times like this, the business needs to do everything it can to drive every last cent back to farmers,” he said. “Management is fully focused on reducing cost and generating cash right across the business. The continuing lift in financial performance and our balance sheet strength will provide opportunities to support our farmers’ cashflows. We will provide an update on this at our interim results on 23 March.”

Chief executive Theo Spierings said dairy exports and imports had been imbalanced for the past 18 months due to European production increasing more than expected, and lower imports into China and Russia – the two largest importers of dairy.