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Fonterra has narrowed its milk price forecast range, giving an implied 'midpoint' price that equals the record payout in 2014

Rural News / news
Fonterra has narrowed its milk price forecast range, giving an implied 'midpoint' price that equals the record payout in 2014

The milk's on the boil and farmers are set to benefit.

Fonterra Co-operative Group has increased and narrowed its forecast Farmgate Milk Price range to $$7.90 - $8.90 per kilogram of milk solids, from its previous forecast of $7.25 - $8.75 per kgMS.

Put in slightly more digestible terms, it means the 'midpoint' price, which is what farmers receive advance payments based on, has been lifted to $8.40 from $8.

At $8.40 it would equal the highest price ever paid, in 2014. At this point, however, there would appear every chance the $8.40 price will be exceeded.

Economists at both Westpac and ASB see the price reaching and in ASB's case exceeding, $8.50. It is something of a good news bad news story, however, as the price squeeze is being caused by falling production levels. 

Additionally, the more Fonterra pays its farmers directly through the milk price, then so this puts pressure on its profit margins as obviously one of its key production inputs (milk) becomes much more expensive for it.

In commenting on the price forecast hike on Tuesday, Fonterra chief executive Miles Hurrell said the lift in the forecast was s a result of continued demand for New Zealand dairy relative to supply.

“At a $8.40 midpoint, this would equal the highest Farmgate Milk Price paid by the Co-op, and would see almost $13 billion flow into regional New Zealand through milk price payments this season.

“We have seen demand from China ease over the past couple of months, while other regions have stepped in to keep demand firm. On the supply side, overall global milk supply growth is forecast to track below average levels, driven by a slowdown in US production due to the increased cost of feed.  

“These supply and demand dynamics are supporting the current pricing levels, and a higher contract rate has given us the ability to narrow the forecast range. 

“While the increase in milk price can put pressure on our input costs, we remain comfortable with our current 2021/22 earnings guidance range of 25-40 cents per share.”

Hurrell said it is still early in the season [seasons begin in June], a lot can change, and there can be increased volatility when prices are high.

“This is why we’re maintaining a plus or minus 50 cents forecast range, reflecting the continued uncertainties at this point in the season.

“There are a number of factors we are keeping a close eye on that could impact demand. This includes the continued impact on global markets from COVID-19, growing inflation pressures, volatility in exchange rates, New Zealand weather conditions, and the potential impact of any geopolitical issues.”

See dairy payout history and economists' price predictions.

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17 Comments

Higher and higher.

As it stands the previously highest payout is a bit incomparable with this payout as the previous one had lots of smoke and many mirrors in its completion.

Likely puts enormous pressure on the other dairy companies. Except Tatua

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The other companies will be experiencing the same very strong demand conditions.
KeithW

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Fonterra isn't predicting pressure on dividend, but wouldn't you expect the high milk price to put pressure on competing investor owned processors profit?

 

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That will certainly bring down our "temporarily high" inflation!

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I have to assume you re being sarcastic. But not all readers will necessarily understand that.

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I don't want to be a negative nelly but I would much prefer if this price lift was coming from increased consumer demand rather than limited supply.

Supply limits - usually related to either weather or high input costs are temporary in nature whereas a lift in demand would seem more permanent. 

And $8.40 times my reduced production to date is no more money in my bank than $8.00 times a normal spring production.

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Inflation adjustment...coming next to a store close to you

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The remarkable feature is the narrowing of the range which has come very early in the season.   It implies that Fonterra must have strong forward sales outside of the GDT auction system.
KeithW

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Where would the demand be coming from Keith? 

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As I understand it, increased interest in the last two months has been coming from outside of China.
Most of the China demand comes through the GDT system, whereas a lot of demand from elsewhere is direct forward sales.
But I would be cautious about drawing any conclusions just yet.
KeithW

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I agree Keith. Hurrell has been very very confident on their mid point pricing as economists' predictions bounced up and down each tender.

It will be interesting how much product Fonterra has forward sold and how much USD they have forward bought. Of course when they get both right they are hero's but history says more often than not they don't and farmers cover with averaging pricing.. 

On a separate note I want to say I told you so. Farmers lose interest in protesting when prices are good. It will be difficult to get any in their tractors at the moment.

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Yea mate - or perhaps it’s been a tough spring farmers are in the middle of mating while they deal with worker shortages.. unfortunately farmers can’t just turn off the lights for the day to protest… but yea sure - maybe it’s the payout..

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Over many, many years I have joined in a number of rural protests.

Who remembers us protesting long and loud because the government through NZ Post was going to raise the annual P O Box rental by a couple of dollars? It wasn't about the money it was the principle of the matter. We ended up looking stupid and deservedly so.

No rural protest has been defeated by any opposition, real or imagined, but defeated by apathy amongst farmers as a result of rising incomes. Opposing forces understand this. That is partly why there is a push of government and council legislation at the moment and Fonterra rules..

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Remember a good bit of the country is in level 3. Or just completely cut off (Northland) from the rest of the country.

In our case we are deemed level 3. Head right at the gateway its level 2 after 16km head left its level 2 after 3km. And there is no other way out. We are an island of level 3. Doomed, stuck. 

Except no one gives a damn, and just goes about their normal business. Govt makes foolish decrees. The people ignore them. Of course the cops are doing roadblocks here and there. Trying their best with limited resources to stop the productive end of society getting their food and fuel. 

Show your papers and ye shall pass. Hand raised in salute. Two fingers placed under the nose, above the lip crossways. Heels click. 

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I think the pertinent question is how long will the high prices hold and what will be the catalyst for a rapid descend.

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in one word CHINA

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That will depend totally on how we manage the China situation. The response of China to particular stances by NZ is predictable. 
KeithW

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