ANZ upgrades milk price forecast to $7.20/kg

Economists expect Fonterra's milk price to come in at near the top of its range for 2020-21. Photo / Supplied

New Zealand dairy farmers face the prospect of being in a comfortable financial position for the second year running if - as economists expect - milk prices head towards the top end of Fonterra's forecast range this season.

ANZ rural economist Susan Kilsby has revised her forecast up by 50c to $7.20/kg and most other banks have a forecast of at least $7/kg, compared with Fonterra's forecast range of $6.70 to $7.30/kg.

Last season's milk price was a healthy $7.14 - a sharp contrast to the $3.90 paid out in 2015-16, which put most farm finances under severe stress.

"Dairy commodity prices have commenced 2021 at a higher level than expected, and, with demand expected to match supply in the coming months, this has mitigated the risk of a sharp decrease in dairy commodity prices in the short term," Kilsby said in a report.

ASB chief economist Nick Tuffley said there was an "upside tilt" to ASB's $7/kg forecast and the signs were looking "respectable" for the 2021-22 season, albeit with the likelihood of a stronger New Zealand dollar putting a brake on returns.

"Most farmers' production costs will be below $6/kg - potentially as low as $5/kg with interest rates being so low," Tuffley said.

"The vast majority of farmers should be getting quite a bit of cream at $7/kg.

"So we are looking at the possibility of two seasons being at $7 or $7-plus, and the prospect of a third season where prices are likely to hold not far off that as well," he said.

But Kilsby said the recent strength in the NZ dollar will impact the 2021-22 season's milk price more than the current season, hence the conservative $6.40 outlook for next season.

Milk price futures are currently priced at $7.10/kg, a cent below last December's peak.

Dairy commodity prices have continued to firm, gaining 3.9 per cent in the first Global Dairy Trade event of 2021.

Global milk supply has continued to expand but so far demand is keeping pace, Kilsby said.

There had been an enduring lift in milk supply in some of the major dairy-exporting regions of the world, including the United States, EU, Australia and New Zealand.

"It was feared that this extra supply would not be able to be absorbed by the markets but thus far demand appears to be holding up well, despite some consumption channels being compromised by social distancing restrictions put in place to prevent the spread of Covid-19," she said.

The additional milk being produced in the United States is currently matched by additional demand created by the Government-funded scheme to provide food boxes to those in need.

These food boxes must contain drinking milk and other dairy products such as cheeses and yoghurts.

Funding for this programme was recently extended to the end of April.

She said dairy commodity prices were likely to be subject to downward pressure at some point in 2021.

"At this point, all signals indicate next season's milk price will be lower than the current season."

ANZ expects the NZ dollar will trade above US70c through to the end of next season, appreciating up to US74c by the end of 2021.