ASB punts on Fonterra sticking with $4.25 milk price

Fonterra has said the main purpose of the announcement was to give an indication of its earnings for the new financial year. Photo / Christine Cornege

ASB Bank is punting on Fonterra leaving its 2016/7 farmgate milk price forecast unchanged at $4.25 a kg of milk solids when the co-operative releases a market update on Monday.

However the risks were "skewed" to a figure as low as $3.90/kg because of a consistently strong New Zealand dollar, ASB rural economist Nathan Penny said in a research note.

Penny said it was still early days in the season, which started on June 1, and that there was plenty of time for dairy prices to rise.

Fonterra has said the main purpose of the announcement was to give an indication of its earnings for the new financial year, with the milk price forecast update tagged on.

Penny said extrapolating current spot dairy prices and the exchange rate equated to a milk price below $4.00/kg, in contrast to the bank's view that dairy prices would rise over the coming months.

ASB expects the earnings forecast for 2016/7 to be similar to that issued for 2015/6 of 45 to 55 c per share.

"If anything, we suspect 2016/17 earnings could be higher than 2015/16," it said.

Meanwhile, the trend in European Union production is down, reflecting the reality of very low milk prices and farm losses.

ASB - one of the more optimistic banks in terms of its milk price forecast - said it expects the price to rise to $6.00/kg by the season's end.

"D-day is approaching, however, for our 2016/17 milk price forecast," Penny said.

"For now though, we stick with our $6.00/kg forecast, but note weakening production needs to translate into material price rises over coming months for this forecast to hold," he said.