The Bank of New Zealand has lowered its 2015/16 milk price forecast for Fonterra to $3.80 a kg of milksolids from its previous forecast of $4.30, but says it expects dairy prices to recover late this year.
The co-operative's farmgate milk price is currently at $5.25 a kg but the Fonterra board is expected to review the forecast when it meets on August 7. The milk price for the year just passed was $4.40 a kg, compared with Dairy NZ's estimate of a breakeven of $5.70.
As a rule of thumb, a $1 per kg drop in the milk price equates to approximately $2 billion less income for dairy farmers.
BNZ said that while the lower New Zealand dollar was providing broad support, international dairy prices had been under severe downward pressure over recent months as ongoing supply expansion, soft demand and Russia's trade embargo had weighed down the market.
"We are of the view that prices remain weak near term, but will recover over the following 12 months," the bank said.
Recent further weakness in general commodity prices such as oil and a reversal in international grain prices following previous gains supported the view that dairy prices will remain weaker than previously anticipated in the near term, it said.
The bank said the wider downward revision to milk price forecasts over recent months had been driven by factors such as ongoing global milk supply expansion, higher-than-anticipated wholemilk inventory in China, US dollar strength, weakness in the euro, the extension of the Russian trade ban on many Western dairy products, general weakness in commodity markets and an associated rise in risk aversion.
Possible reasons for a price improvement from late 2015 could include likely lower production arising from very low prices.
Low prices would also encourage consumption.
BNZ said the drought in California continued to dent milk production from the biggest producing state in the US.
The bank's $3.80 forecast depends on wholemilk powder prices remaining weak in the near term before approaching US$2500 a tonne by mid-next year.
At last week's GlobalDairyTrade auction, prices were at $1848 a tonne, down 13.1 per cent from the previous auction.
Other banks' forecasts for the farmgate milk price vary.
ANZ expects $3.75 to $4 a kg for the current season, Westpac expects $4.30 while ASB is sticking with its forecast of $5.