Santa may not bring what dairy farmers want this festive season, with most analysts expecting a drop in the Fonterra farmgate forecast payout before Christmas.
By: GERARD HUTCHING
Under the terms of the Dairy Industry Restructuring Act, Fonterra is legally obliged to provide an update on the forecast payout in December.
Federated Farmers, though, remain optimistic the dairy giant will maintain its current forecast price of $6.75 per kilogram of milksolids, set in July.
Dairy group chairman Chris Lewis said the milk market was competitive in the heavy producing regions of Waikato, Manawatu, Canterbury and Southland and other processors were paying good prices.
For example, in a letter to shareholders this week Westland Milk Products have pledged to hold its earlier range of $6.40 to $6.80 for this season.
He also pointed out the New Zealand dollar had depreciated from 74c against the US last year to 68c now, which would help support prices.
But analysts say the latest global dairy auction results and other market signals are pointing towards a revised figure around the $6.50 mark.
If that was the case it would mean a reduction of almost $500 million for the economy. For the average farmer, it would mean a $39,000 drop in income, based on a 419 average herd size that milks 373kgMS per cow.
AgriHQ’s Amy Castleton said the outlook was generally weaker. She agreed a lower dollar helped, and while Fonterra hedged much of its foreign exchange requirements, there was still a portion of its sales that was subject to exchange rate movements.
OM Financial said if prices remain unchanged to the end of the season in May, it estimated a payout of $6.62, but by incorporating NZX dairy futures, it projected a weaker milk price of $6.50
ASB rural economist Nathan Penny trimmed his forecast to $6.50, pointing out prices had now fallen for four consecutive auctions.
Over this period, overall and whole milk powder prices have dipped by around 10 per cent, while butter prices have eased nearly 15 per cent. Anhydrous milk fat has been the lone holdout, rising around 2 per cent over the same period.
New Zealand production for October lifted 2.9 per cent compared to October 2016, after August and September had been behind 2016 levels.
“New Zealand production has rebounded sooner than we expected from the very wet weather – we had expected the rebound to come over the summer and autumn. It seems that New Zealand weather and thus production can turn on a dime,” he wrote in the ASB’s latest Rural Economic Note.
Rabobank analyst Michael Harvey would not be drawn on a number, except to say there was a likelihood of a downward revision to Fonterra’s forecast payout.
Westpac economist Shyamal Maharaj supported a revision.
“It’s almost impractical for Fonterra to keep their forecast at $6.75 considering the recent GDT data as well as other market indicators.”
“The main thing we’re looking at it is the outlook for the Chinese economy next year, we’ve forecast whole milk powder prices will reflect a softening of Chinese demand,” Maharaj said.
After the GDT two weeks ago, the ANZ lowered its milk price forecast to a range of $6.25-6.50.
Meanwhile in Europe the European Commission has started to sell skim milk powder below its purchase price, in an attempt to clear its two-year stockpile before the product begins to spoil.
The intervention purchase price is set at €1693 per tonne and a recent sale of 44 tonnes was at about €1450/tonne, indicating a change in attitude by the Commission.