Westpac economists react to the latest dairy prices surge by raising their forecast for the milk price to $7.90 - which is close to the top end of Fonterra's forecast guidance range to farmers

It could soon be back to the future for dairy giant Fonterra and its forecast of the farmgate milk price - as dairy prices continue to rally strongly after a big mid-year slump last year.

Following further gains at the GlobalDairyTrade auction early on Wednesday, overall dairy prices are now up 7.9% so far in this still-young calendar year.

And in fact, since troughing in mid-August 2023, prices are now up over 30%.

Volatility is to be expected through the milk production season - but the current season, which began in June 2023 - has seen more than its fair share.

Between June 2023 and mid-August prices slumped over 15%, only to - as noted above - now recover, and more, by some 30%.

This yo-yoing of the global prices has been reflected in the forecasts Fonterra has been making of what it may pay its farmers this season for their milk.

The dairy co-operative issues its forecasts these days in the form of a forecast range, from which observers calculate a 'midpoint' price as some indication of what Fonterra's expecting.

Fonterra started the current season, in effect, forecasting a price of $8 per kilogram of milk solids (kgMS), but then in short order was forced to take this down all the way to $6.75.

The actual price paid to farmers for the 2022-23 season, which finished in May last year, was $8.22 per kgMS, while this was itself down on the all-time high of $9.30 per kgMS paid for the 2021-22 season.

So in comparison, things were looking pretty rough for this season.

However, since that August 2023 trough both Fonterra and economists have been scrambling to raise forecasts again as global prices have headed North.

The most recent Fonterra forecast in early December was for a price range of $7-$8, so giving a midpoint of $7.50 per kgMS - but global dairy prices have risen by more than 10% since that forecast was made. Continuation of such a trend would surely see Fonterra back with an upwardly revised forecast sooner rather than later.

Following the most recent dairy auction, Westpac economists have revised up their milk price forecast to $7.90 per kgMS up from $7.50 previously and close to the top of Fonterra's forecast range. For the moment Westpac's forecast puts them at the top (though only just) of the main bank economists' forecasts.

In Westpac's Agri Update, chief economist Kelly Eckhold, while noting the big increase in global dairy prices since August, said that on a longer horizon, prices are "only a touch above" long-term averages.

"This demonstrates that these are hardly bumper years for dairy farmers even though the worst fears of 2023 haven’t been realised. This is especially so given the rise in on-farm costs over recent years."

Eckhold says the Westpac economists will be providing an initial forecast for the 2024/25 milk season in a couple of weeks.

"However, based on current trends it looks like next year should be a touch better than this year – albeit not especially stellar. We see improving global demand helping lift prices and a further improvement in costs balanced with a firmer New Zealand dollar over the year ahead."