Australian dairy giant Murray Goulburn is in a trading halt

A robotic rotary milking parlor. David McNew/Getty Images

Murray Goulburn, the largest processor of milk in Australia, has gone into a trading halt as it works out how much damage falling dairy prices have done its forecasts.

The cooperative formed in 1950 requested the halt of its listed unit trusts to asses the “impact of market conditions on its FY16 outlook”.

The industry is suffering from a global glut of dairy products caused by weaker demand and overproduction.

Slower economic growth in China, a major export market for milk producers, has slowed demand.

And in Europe, there’s been sharp rise in production coupled with Russian import restrictions closing a major market to those producers.

Murray Goulburn, in its half year results released in February, said an expected recovery in prices was taking longer than expected due to the continuing oversupply in global markets.

The low prices dragged Murray Goulburn’s profits down by a third to $10 million for the six months to December.

Announcing those results, managing director Gary Helou said:

“The first half has seen the continuation of the decline in Chinese imports of commodity dairy ingredients and the ongoing Russian embargo on dairy imports. This has been compounded by increased European milk supply, resulting in a period of significant oversupply in global dairy commodity markets, driving commodity prices towards record lows.”

However, signs are emerging that milk production growth in Europe is finally slowing, according to analysts at Rabobank.

“The removal of milk quotas on April 1, 2015, signified the end of more than three decades of regulation in the European dairy industry,” says Netherlands-based Rabobank senior dairy associate Matt Johnson.

“While the subsequent surge in milk production across many EU member states was anticipated, the fact that this growth has been sustained, despite the slump in global dairy prices, has taken everyone by surprise.”

“However, the cost of production is now below break-even for many European producers, and we are starting to see this translate into an increased focus on cost-saving rather than expansion.”

In New Zealand last month, the world’s second largest milk processor, Fonterra, forecast that its milk payout for the season ending in May will be $NZ3.90 per kilogram of milk solids, down from its previous forecast of $NZ4.15 and well below the $NZ5.25 at the start of the season.

Value added dairy producers such have managed to dodge much of the impact from the global glut.

Bega Cheese posted a 139.5% rise in half year profit to $14.499 million on a 1.6% rise in revenue to $561.37 million. This was achieved via an increase in infant and nutritional formula sales and a rise in the value of its canned goods.

Strong infant formula sales at Bellamy’s and at a2 Milk are being driven by increasing demand from China’s middle class for guaranteed clean and safe products.

The ratings agency Moody’s has warned that the decline is credit negative to banks because a lower payout reduces the income of farmers and threatens the asset quality of banks exposed to the dairy sector, especially in New Zealand.

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