Fonterra likely to lift farmer payouts further this season, analysts say

Wednesday 7th December 2016

Fonterra Cooperative Group is expected to lift its farmgate milk price payout to farmers after a further gain in global dairy auction prices overnight.

New Zealand's dominant milk processor hiked its milk price forecast last month to $6 per kilogram of milk solids for the current season, compared with $3.90/kgMS last season, and analysts in a BusinessDesk survey expect it will raise the price further as dairy prices continue to lift on the GlobalDairyTrade auction platform. Analysts are now expecting the payout to be between $6 and $6.50/kgMS.

Prices for whole milk powder, New Zealand's key commodity export, increased 4.9 percent to US$3,593 a tonne at the latest GlobalDairyTrade auction overnight, taking the gain since early July to 74 percent. Prices have now risen above the level needed for most dairy farmers to break even, following two consecutive seasons of losses, amid lower supply.

"The spike in dairy prices since July has got legs," said ASB senior rural economist Nathan Penny. "Dairy supply has fundamentally corrected, leading to a similar correction in prices. And the auction overnight has seen the price surge further solidified. If anything, we see prices going higher."

ASB's Penny said whole milk powder prices may challenge US$4,000 a tonne in the New Year, a level it last reached in April 2014, as milk production slows in New Zealand and Europe.

Penny said there's "clear upside" to his $6/kgMS milk price forecast if prices remain at or near current levels, and his forecast is under review.

ANZ Bank New Zealand raised its forecast after the latest GDT this morning to $6.25/kgMS from its previous range of $5.25/kgMS to $5.50/kgMS, and agri-economist Con Williams said there is "upside risk" if current prices prevail in the New Year.

Market indicators are pointing toward a $6.40/kgMS to $6.50/kgMS milk price assuming current prices hold through the remainder of the season, Williams said.

Westpac Bank senior economist Anne Boniface also raised her forecast following the GDT uplift overnight to $6.20/kgMS from $5.80/kgMS.

"There’s no doubt that fundamentals have moved in favour of dairy producers. Global supply is tightening, and there are more positive signs on the demand front, particularly out of China," Boniface said. Still, she noted "the durability of the recent improvement in prices will in part hinge on the sustainability of the recent pick-up in Chinese demand."

Boniface expects some moderation in prices in the New Year as global supply responds to the lift in prices over recent months.

Bank of New Zealand senior economist Doug Steel raised his forecast today to $6.40/kgMS from $6/kgMS, and noted the price could go higher if global milk supply continues to contract more than anticipated.

"Our new forecast includes ongoing firm pricing near term, with some retreat into season end as the current intense global milk supply squeeze somewhat abates," Steel said. "We see risks tilted to near-term price gains, but with the potential for some consolidation during 2017."

Brokerage OMF said the latest uplift confirmed its view for a $6.50/kgMS milk price this year.

Auckland-based Fonterra is holding its annual meeting in Darfield tomorrow and analysts raised the prospect it could hike its forecast again. The increase in Fonterra's forecast is estimated to add an extra $3.8 billion to New Zealand's economy.

BusinessDesk.co.nz

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