Farmgate milk price waiting game

Fonterra expects dairy prices to recover in the first half of next year. Photo / David Kerr

Fonterra faces pressure to cut forecast but has time on its side

Pressure is mounting on Fonterra to cut its farmgate milk price forecast at this week's board meeting, but it's looking like a close call.

Fonterra had expected prices to remain volatile for the rest of this year, but for a recovery to occur in the first half of next year.

Its current forecast of $4.60 per kilogram of milksolids rests on wholemilk powder reaching US$3000 a tonne by the first quarter of 2016.

Considering wholemilk powder was priced at US$2226 a tonne at the last GlobalDairyTrade auction, the market has a long way to go before that forecast can come to fruition. Futures market pricing, however, suggests the market is on the improve, and Fonterra has a little time up its sleeve.

"It's going to be a close-run thing," said ASB Rural economist Nathan Penny. "If you look at prices since Fonterra last updated the market, they have bounced around a bit, but overall they are down.

"On that basis, you would expect a change but Fonterra's view is that prices will recover in the first half of next year.

"They have got a little bit of time on their side but not much, so I guess there is an outside chance that they will stick with $4.60, but the risk is it will drop by 20c to 40c."

AgriHQ's theoretical farmgate milk price sits at $4.48 per kg, but the specialist's dairy analyst Susan Kilsby is not expecting a downward revision this week.

"It would not surprise me if they left it where it is, because we've still got a long way to go," Kilsby said.

The GlobalDairyTrade price index was up 3.6 per cent last week, after falls in each of the preceding three auctions. Futures market pricing suggests next week's sale - the last for 2015 - will show another improvement.

ANZ Bank has a $4.25 to $4.50 per kg milk price, but the bank's rural economist, Con Williams, expects the co-op to hold the line on Thursday.

"Despite the bounce at the latest GDT, year-to-date pricing only indicates something around the $4/kg mark at present," Williams said.

"We struggle to see what will drive prices up to the US$3000 mark, at least in the time-frame that is required.

"The most obvious catalyst is El Nino biting early, but from a broader farm income perspective, a New Zealand drought is certainly not a desirable way to drive prices higher."

Farmers can also expect an update on whether Fonterra's support package - an interest-free loan of 50c cents for per kg of milk solids - will be renewed.

While farmers will be bracing themselves for the likelihood of two years of low farm-gate milk prices, the Fonterra Shareholders' Fund unit price has been going from strength-to-strength. By the close of trading yesterday, the NZX-listed units were at $5.81, up 4c from Friday's close, and their highest point since March this year.

Milk review

• Fonterra's board to review forecast this week.

• Current prediction rests on wholemilk powder hitting US$3000 a tonne by the first quarter of 2016.

• Wholemilk powder was priced at US$2226 a tonne at the last GlobalDairyTrade auction.