New Zealand dairy farmers look set to enjoy what may become the third year in a row of $6-plus milk prices in the coming season, economists say.
Fonterra has a milk price forecast of $6.55/kg of milksolids for the season, which ends on May 30.
That’s up from $6.12/kg in 2016/17.
Another strong milk price will allow farmers to further repair damage to their balance sheets incurred when it dropped to $4.40/kg in 2014/15 and $3.90/kg in 2015/16, down from a record high of $8.40/kg in 2013/14.
Fonterra is expected to issue its opening forecast for the coming 2018/19 season later this month.
All the major bank economists expect to see a $6-plus milk price, and some expect to see a small upward revision to the current forecast for 2017/18, thanks in part to recent weakness in the NZ dollar.
Rural lending specialist Rabobank said the season could get off to a “shaky” start but that it expected a strong finish, ending with a milk price of $6.40/kg.
The bank’s dairy analyst Emma Higgins said the 2018/19 season should be profitable for most New Zealand dairy farmers, despite greater uncertainty surrounding their operating environment.
One of the global risks looming in the near term is the peak period of milk production in the northern hemisphere, she said.
“The northern hemisphere flush will be an influential pressure point for commodity prices at the start of the 2018/19 season and we anticipate that supply will outstrip global demand in the coming months,” Higgins said.
“However, as the second half of the 2018/19 season develops, Rabobank anticipates commodity prices will improve as production growth from key exporting regions decreases and a robust import programme by Chinese buyers supports commodity prices across this period,” she said in a report.
ANZ rural economist Con Williams said conditions for farm-gate returns in the dairy sector remained favourable.
“Broadly, we see global milk supply growing at, or slightly below, trend with a number of country-specific limitations and the marginal cost of production lifting,” he said.
“With whole milk powder is holding in a broad US$2800 to US$3300/tonne range, New Zealand skim milk powder continuing to attract a premium versus other suppliers, and milkfat prices set to follow a similar pattern to 2017/18, this gives a farm gate milk price range of mid-to-high $6/kg,” he said.
ANZ is picking an opening milk price of $6.75/kg.
ASB Bank rural economist Nathan Penny said a slight upgrade to the current season’s milk price was possible. He expects a 2018/19 forecast of around $6.50, with the potential to go higher.
“We have been optimistic that [dairy] markets have been quite balanced,” he said. “At $6.00-plus, most farmers will be in the black,” he said.
“The majority will be able to pay down debt that they may have incurred over the downturn.”
Westpac economist Anne Boniface agreed that repairing balance sheets after the downturn would be high on farmers’ agendas.
But commodity fluctuations are not the only challenge that farmers are facing, she said, citing environmental constraints and regulatory changes, and cattle disease Mycoplasma bovis.
Whole milk powder prices – which have the greatest bearing on Fonterra’s milk price forecasts – have been comfortably above US$3000 a tonne for most of this year.
Futures market pricing suggests prices at this Wednesday’s GlobalDairyTrade auction will be flat.
OM Financial’s director of financial markets, Nigel Brunel, said notoriously volatile dairy markets had shown signs of stabilising over the last 12 to 18 months, and with the all-important whole milk powder trading in a 10 per cent range.
Meanwhile, the milk price futures contract is pointing towards a $6.60/kg milk price for 2018/19, he said.
By: Jamie Gray
Source: NZ Herald