Fonterra says it's now forecasting a milk price for farmers this season of between $6.25 and $6.50 per kilogram of milk solids, down from its previous forecast of $6.75

By David Hargreaves

Fonterra has had to trim its milk price forecast for this season and has also increased its forecast New Zealand milk collection volumes from 1,525 million kgMS to 1,550 million kgMS in reaction to strong early season production.

Last season Fonterra collected 1,505 million kgMS, so, the new forecast represents a 3% expected production lift for this season.

The dairy co-operative has taken the new approach of providing a range of potential prices, as opposed to the usually seen specific quoted figure.

Fonterra's now saying the milk price for this season could come in between $6.25 and $6.50 per kilogram of milk solids.

This is down from the $6.75 forecast made in August and the season-opening forecast of $7. See dairy payout history here.

ASB chief economist Nick Tuffley said ASB's "back-of-the-envelope estimates" suggest that a downward revision of the milk price from $6.75 per kgMS to $6.25-$6.50 per kgMS would lower farm incomes by $380m-$760m in the 2018/19 season.

"But factoring in Fonterra’s higher volume forecast, the net hit to farm incomes will be in a $220m to $620m range, according to our estimates."

While Fonterra's decided to give a range of potential milk prices, chief executive Miles Hurrell stressed that the Advance Rate to farmers is based on $6.25 per kgMS "and the final price could be outside this range as we are still early in the season and up against considerable volatility".

"We therefore recommend farmers budget with ongoing caution."

The dropping by Fonterra of its milk price puts it now more in line with economists' projections, though if you take the lower $6.25 figure in the range, it actually starts to undercut some of the economists' predictions.

The news that milk productions could now be as much as 3% more than last season may put further downward pressure on global dairy prices, which have been slumping in any case.

Overall prices in American dollars, as measured by the GlobalDairyTrade price index, are down by about 14.5% in the past 12 months - although the falling value of the Kiwi dollar in recent months has alleviated that considerably with the drop in NZ dollar terms being more around 2.5%. 

Hurrell said Fonterra was still seeing strong production coming from Europe, US and Argentina.

"While the hot weather in Europe has slowed down the region’s production growth, it is still tracking ahead of last year. US milk production is up slightly and Argentina’s is up 6.8%.

Global demand "is simply not matching current increases in supply", he said.

“At recent Global Dairy Trade (GDT) events, prices for all products that make up the milk price have fallen. Demand for WMP, in particular, continues to grow in China, and it remains strong across South East Asia, but it simply isn’t matching current levels of supply.”

On the decision to move to forecasting a range of possible milk prices for the season, Hurrell said it was part of Fonterra's intention "to provide the best possible signals".

“We operate in a hugely volatile global market place, so it is very difficult to pinpoint an exact forecast Farmgate Milk Price this early in the season. For example, weather conditions can change suddenly and this can have a significant impact on the global milk supply."

ASB's Tuffley said despite the announcement from Fonterra in reducing its forecast, the medium-term outlook for the sector remains favourable, with strong demand from Chinese and South East Asian consumers.

However, in the short-term, "we expect more downward pressure on dairy prices", he said.

"NZ is at its seasonal peak in production in October and in line with this peak auction volumes are also at their highest level for the year."

This is the statement from Fonterra:

Fonterra Co-operative Group Limited today revised its 2018/19 forecast Farmgate Milk Price from $6.75 per kgMS to a range of $6.25-$6.50 per kgMS and increased its forecast New Zealand milk collection volumes by 1.3 per cent to 1,550 million kgMS.

Fonterra Chief Executive, Miles Hurrell, says the change in the forecast Farmgate Milk Price was due to a stronger global milk supply relative to demand at this time.

“I know how hard it is for farmers when the forecast Farmgate Milk Price drops, but it’s important they have the most up to date picture so they can make the best decisions for their farming businesses.

“We are still seeing strong production coming from Europe, US and Argentina. While the hot weather in Europe has slowed down the region’s production growth, it is still tracking ahead of last year. US milk production is up slightly and Argentina’s is up 6.8%.

“Here in New Zealand, the season has got off to a positive start, mainly thanks to good weather and early calving in the South Island. As a result, we have increased our forecast milk collections for the year to 1,550 million kgMS – up from 1,525 million kgMS.

Mr Hurrell says that global demand is simply not matching current increases in supply.

“At recent Global Dairy Trade (GDT) events, prices for all products that make up the milk price have fallen. Demand for WMP, in particular, continues to grow in China, and it remains strong across South East Asia, but it simply isn’t matching current levels of supply.”

Talking about the new move to provide a range for the forecast Farmgate Milk Price, Mr Hurrell says it was part of the Co-op’s intention to provide the best possible signals.

“We operate in a hugely volatile global market place, so it is very difficult to pinpoint an exact forecast Farmgate Milk Price this early in the season. For example, weather conditions can change suddenly and this can have a significant impact on the global milk supply.

“As a result, we have chosen to give a range of $6.25-$6.50 per kgMS and be clear that the Advance Rate is based on $6.25 per kgMS and the final price could be outside this range as we are still early in the season and up against considerable volatility. We therefore recommend farmers budget with ongoing caution.”

The timing of today’s update is driven by available market information and is not a DIRA requirement. Fonterra is required to give a forecast for DIRA purposes by 15 December 2018.