ASB economists raise forecasts for Fonterra's milk price both this year and next

ASB economists have raised their forecasts for Fonterra's milk price this year by more than 6%, following more increase in prices in the global auction overnight.

Prices in the GlobalDairyTrade auction firmed by 10.1%, backing up increases from the previous auction last month.

ASB rural economist Nathan Penny said on the back of the results from the last two auctions the bank's economists had have revised  their our milk price forecast for this season up by 30 cents to $5.00/kg. That's 30c higher than Fonterra's current forecast.

"We had factored in steadily rising prices over the season, but we are largely already there," Penny said.      

"Moreover, we have lifted our 2015/16 forecast by 50 cents to $6.50/kg. 

"Generally, farmers have begun to respond to lower global farmgate milk prices (and in the case of NZ, prompted further by dry conditions) by slowing their production.  And now as this happens we also expect demand to firm in the second half of 2015, particularly as the Chinese economy perks up, aided by lower energy prices. 

"While this result has given upward momentum to dairy markets, NZ farmers still have to deal with drought (or dry conditions), slowing production growth and the accompanying lower farm revenues in the short term.  By in large, however, we think farmers are well-placed to manage through this difficult season, and the prospect of a firmer 2015/16 milk price will lift their confidence about the medium term."

Westpac senior economist Michael Gordon said Westapac economists were sticking with their previous price forecast for this year of $5, "for now".

"While a case could be made for nudging it higher after last night’s auction, it would only amount to fine-tuning at this stage. Note that Fonterra is expected to hold a board meeting in either late February or early March, and an update on the milk price forecast could follow. The rule of thumb is that Fonterra makes an announcement once its milk price forecast has changed by 30c or more, so any announced upgrade in the next few weeks would be to at least $5.00/kg," he said.

ANZ's agri economist Con Williams said evidence that "a more material correction" in prices was now taking place "was a lot more convincing than [in] the previous auction".

"Whole milk powder (WMP) again led the charge increasing by 13.7% to sit at US$3,272/t, with an upward sloping curve into the middle of the year. This potentially sets a higher base for the milk price heading into the 2015/16 season, which would be good for the opening advance in May," he said.

Williams said that with auction prices now tracking above Fonterra’s December forecasts this increased the possibility that "there could be some slight upside to the 2014/15 milk price".

"Fonterra is expected to provide an update early next week. Any improvement would come as a welcome relief to farmer’s cash flow during the July-October period.

"But farmers won’t be going out popping the champagne as the major reason for the turn in prices is drought in certain regions and the low farm-gate price restricting the use of supplementary feed.

"Currency markets appear to have taken heed that the sector's earning potential isn’t solely about price direction overnight. The likes of NZD/AUD and NZD/USD were little changed, although there did appear to be some front running earlier in the week.

"The dynamics surrounding dairy prices could make for an interesting middle of the year for currency markets. A normalisation in weather conditions as winter approaches with dairy prices returning to their medium-term average (or above) along with rest of the New Zealand ticking along at a reasonable pace would be NZD supportive."