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Australian milk production to fall as processors slash farm-gate prices

SYDNEY/WELLINGTON - Australia milk production will fall during the 2016/17 season after processors in the world's fourth largest exporter slashed prices paid to suppliers, forcing farmers to slaughter cattle, analysts said on Monday.

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SYDNEY/WELLINGTON - Australia milk production will fall during the 2016/17 season after processors in the world's fourth largest exporter slashed prices paid to suppliers, forcing farmers to slaughter cattle, analysts said on Monday.

Global milk prices have tumbled 60 percent since early 2014, due to a global supply glut, and lower Australian production may alleviate some pressure, said analysts.

The world's largest dairy exporter Fonterra Co-operative Group Ltd and the listed arm of Australia's biggest milk processor Murray Goulburn cut farm gate prices by up to 15 percent in the past few weeks, as global production growth offset sluggish demand increases.

The Australian Competition and Consumer Commission is examining the timing and notice of the cuts, exposing both to fines of A$1.1 million if found guilty of misleading conduct or elements of unconscionable conduct.

"Having the price cut at the eleventh hour is particularly disappointing, it is unprofessional," said Stuart Crosthwaite, a dairy farmer from the southern state of Victoria, who supplies Murray Goulburn and plans to slaughter some of his herd.

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Analysts expect the national dairy herd of 1.74 million head to fall due to the price cuts, but by how much is still uncertain, with milk production set to fall below the official 9.8 billion litres forecast in March.

"With lower farm-gate prices, I would expect to see a further increase in cull rate of less productive dairy cattle," said Phin Ziebell, agribusiness economist, National Australia Bank.

However, Australia's dairy farmers are likely to weather the price cuts due to record prices last season, which has enabled them to repay debt rather than expansion, said analysts.

"Farmers are better placed to withstand events like this than they have been in the past," said Michael Harvey, senior analyst, Dairy at Rabobank.

Australian dairy production is worth A$2.4 billion, but accounts for only about 2 percent of global milk and approximately 7 percent of all dairy exports, industry body Dairy Australia estimates.

In contrast, the world's largest dairy exporter New Zealand is expected to see some gains in farm-gate prices. But production is likely to remain flat after farmers culled large numbers of cattle last season.

Four economists polled by Reuters expect Fonterra to pay its farmers between NZ$4.50 - NZ$5.00 per kilo of milk solids in the 2016/17 season, up from the previous season's NZ$3.90 per kilo. Fonterra is due to announce its forecast at the end of May.

Fonterra said on Monday it would make an early dividend payment to help its struggling New Zealand farmers, with 85 percent of country's farms operating at a financial loss.

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"It gives them cash earlier. It is not necessary more cash than would have otherwise been the case, but it certainly helps the cash flow," said Doug Steel, BNZ Senior Economist.

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