Westpac economists now see milk price of just $4.60 in 2017 as another fall in dairy prices looms in this week's auction

By David Hargreaves

Westpac economists have slashed their year-ahead forecast for the farmgate milk price to just $4.60 per kilogram of milk solids for 2017, as another fall in dairy prices looms in this week's global auction.

The Westpac economists have dropped their 2017 forecast by some 60c from their most recent pick of $5.20. If such a price ($4.60) eventuated next year then this would be the third consecutive season in which farmers have seen returns of under $5. Last year the price for Fonterra farmers was $4.40, while this season Fonterra's currently forecasting $4.15 - though this projection is already under severe pressure. See here for the full dairy payout history.

Futures trading has suggested there may be another overall drop in prices in excess of 5% at this week's GlobalDairyTrade auction in the early hours of Wednesday morning our time, with the key Wholemilk prices perhaps dropping as much as 10%.

ANZ recently slashed its milk price forecast for the current season to just $3.95, while it's now forecasting $5 for 2017.

Westpac economists have also trimmed their forecast for the current season, back to $4 from $4.20 previously.

But it's the increasingly pessimistic view of NEXT season's forecasts being taken by economists that will be of concern for farmers and bankers.

In their weekly commentary the Westpac economists say if they are right with their new forecasts, "it will mean many dairy farmers are staring down the barrel of three consecutive seasons of negative cash flow".

"This is likely to be another knock to fragile rural confidence. And with the latest Federated Farmers confidence survey showing that 43% of farmers already intended to reduce spending over the next year (compared with just 15% who expect spending to increase) even before the latest step down in prices, it probably won’t be long before the downbeat outlook is being reflected in confidence further afield. Increased concern about prospects for the global economy, financial market conditions and weaker dairy prices have all been identified by the Reserve Bank as downside risks to its policy outlook which may require “some further policy easing” over the coming year".

ANZ economists said in their weekly newsletter that while further price pressure is expected at this week's dairy auction, lower volumes, higher participation from Chinese buyers at the last auction, and already-low prices suggest the fall "may not be as large as implied by the futures market".

"That said, conducive weather conditions are reportedly seeing strong milk supply growth in Europe; some Chinese buyers could still be on holiday (New Year celebrations); and there has been an increase in the forecast volumes of SMP, AMF, butter and casein at upcoming auctions. The latter indicates the improved seasonal conditions for New Zealand milk supply and the preferred product mix (due to better returns)."

ASB economists are currently forecasting a milk price of $4.10 for this season and in excess of $6 for next year, but concede in their weekly newsletter that "if we see another price fall overnight on Tuesday, we will likely revise lower our current season milk price forecast as well as our 2016/17 milk price forecast".

Meanwhile, Fonterra announced today that it was decommissioning one of its powder dryers and turning more milk into "a range of high value products".

This is the full statement from Fonterra:

Fonterra Whareroa’s oldest powder dryer will take an extended break from April, as the plant is decommissioned to bolster the site’s value-added operations.

The temporary closure of the iconic dryer, known as ‘P1’, will see more milk turned into a range of high value products, including milk protein concentrate which is currently in high demand.

Fonterra Managing Director Global Operations, Robert Spurway says P1 has served the business well over the years but is coming to the end of its lifespan.

“P1 was one of the country’s flagship dryers when it was first opened in 1973, and has been an important part of our asset mix ever since. Over its 43 years, it has produced more than half a million metric tonnes of milk and protein powder.”

“However, as technology advances and markets continue to evolve, so too must our Co-operative.  We are constantly honing and improving our asset base in order to maintain operational excellence, achieve greater efficiencies and deliver on our value add strategy,” says Mr Spurway.

The P1 building will remain on the site, giving the option to re-open the plant in the future to help meet milk growth in the central North Island. Staff from the plant, as well as its machinery and technology, will assume new roles across the site’s nine other plants.

This project is part of a business-wide review to identify efficiencies and ensure the Co-operative is well-placed to respond in an increasingly volatile and competitive environment, says Mr Spurway.

“We have a responsibility to our farmer shareholders and our customers to be more efficient in all facets of our business, and projects like the one at Whareroa are helping us to identify areas where we can make significant and sustained cost savings.”