Fonterra is expected to forecast a higher farmgate milk price for the coming season when its board meets next week, with the overall dairy industry tipped to get a boost of up to $1.35 billion.
The board will also take another look at the current season’s forecast, which sits at $6.00/kg of milksolids, with an outside chance it could be upgraded a little.
GlobalDairyTrade prices have pushed up since March, especially for the key product of whole milk powder, which has exceeded US$3000/tonne.
Most analysts expect a forecast in the low $6s for next season, although ASB rural economist Nathan Penny is picking $6.75/kg.
Two successive years of $6.00-plus milk prices would help farmers repair the damage to their balance sheets incurred over the 2014/15 and 2015/16 seasons, when prices slumped to $4.40/kg and $3.90/kg respectively.
A milk price of $6.75/kg for the season would represent a $1.35 billion injection for the economy from the entire dairy sector compared with the previous year, Penny estimated.
“Looking ahead, we think the dairy markets are starting the year in a good position,” he said.
“We have pencilled in $6.75/kg based on current spot prices and the exchange rate.”
Penny said Fonterra’s opening estimate for 2017/18 was likely to be conservative and at the low end, given the season is not yet under way.
An added complication for the co-op will be a late surge in production in autumn following on from bad growing conditions in the spring.
Fonterra had originally expected to see a 7 per cent decline in production over 2016/17, but now it looks like it will only be down by just 1 or 2 per cent.
On the supply side, production in New Zealand, Australia, Europe and Argentina had all come back, and demand was growing, he said.
ANZ rural economist Con Williams said there was a chance of an upgrade to the current season’s forecast to $6.10 to $6.15/kg, and he expected a milk price of around $6.25/kg for 2017/18.
Rabobank said dairy farmers could look forward to a favourable season, but with qualifications.
“The price rally experienced since the second half of 2016 has had some of the gloss removed with stronger than anticipated production from New Zealand impacting on prices,” the bank’s dairy analyst Emma Higgins said in a report.
“These dynamics are set to keep global supply and demand largely in balance and, assuming a spot currency rate, we forecast the global market is in line to deliver a farmgate milk price near $6.25/kg,” she said. At that level, most New Zealand farmers would be profitable.
The most significant “upside” to Rabobank’s outlook was the possibility of a sharp increase in New Zealand dairy exports to China.
“Chinese production has been struggling to keep pace with our low consumption growth forecast of 1 per cent and stock levels are now very low. We see import growth of 20 per cent year-on-year as a possibility for 2017, which would barely restore inventory levels,” she said.
“New Zealand is well positioned to play a lead role in providing product to China, particularly so in the event that other large whole milk powder-producing countries struggle to increase their output over 2017.”
Also on the agenda for next week’s Fonterra board meeting will be the co-op’s performance over the third quarter.
Fonterra is expected to announce the interest rate on its support loan scheme, which was designed to tide its farmers over during the price slump.
Most farmers availed themselves of the interest-free scheme to the tune of a total $383 million and about $363m remains outstanding.
Interest becomes payable on the loans if the milk price exceeds $6.00/kg, but farmers will not have to pay straight away because of the stepped nature of the way Fonterra structures its advance payments.
The GlobalDairyTrade auction overnight was the last for the 2016/17 season, which ends on May 31.
Source: NZ Herald