ASB Bank senior rural economist Nathan Penny. Photo / Supplied
ASB Bank senior rural economist Nathan Penny. Photo / Supplied
Open Country, New Zealand's second-biggest dairy company, is picking an initial farmgate milk price of mid to low $6/kg milksolids for the imminent new season, a brighter take than some predictions.
Also more bullish at $6.50/kg is ASB senior rural economist Nathan Penny, though he serves this with a largeside of caution due to the potential for Covid-19 market uncertainty to stir up volatility again.
The predictions are in contrast to Rabobank's Covid-19-influenced forecast of $5.60/kg for the 2020-2021 season which officially starts on June 1. Federated Farmers has also told Parliament's Epidemic Response Committee that this season's $7/kg-plus price could sink to $5/kg next season.
Meanwhile Miles Hurrell, the chief executive of dairy industry price-setter Fonterra, has told the Herald it is "incredibly difficult for anyone" to make a call about next season's forecast milk price at this time.
"Due to Covid-19, the international situation is changing daily and could have an immediate and significant impact on the global dairy market."
Fonterra's latest forecast for the current 2019-2020 season is $7-$7.60. It will announce the new season's opening forecast in late May. The farmer-owned co-operative's limited guaranteed milk price offer for the new season was $6.32.
Open Country chairman Laurie Margrain said the privately owned company would review its milk price thinking later this week but "my guess is it will support something in the low to mid-$6 range".
"We don't so much forecast a season any more as we keep forecasting a rolling 12 months out in advance."
Open Country chairman Laurie Margrain. Photo / Alan Gibson
Margrain said there was no guarantee the assumptions Open Country used were the right ones.
"But our track record has been very, very good. Of course the reality is we are in uncharted waters and markets do not like uncertainty. Uncertainty usually delivers volatility."
The company's forecasting was based on current spot prices, recent global dairy trade auctions, global supply and demand, milk production forecasts and demand assumptions around the world and futures pricing.
Dairy cows at the base of Mt Taranaki. Photo / File
Open Country also took into account what some economists and Rabobank were thinking, Margrain said.
If the company came up with a number that was materially different to others it would question whether its assumptions were valid.
"But we tend to run our own race and back our own assumptions," he said.
Rabobank's low-ball season-ahead forecast has had a depressing impact on the NZX milk price futures contract - which farmers use as a hedging tool. The September 2021 milk price futures contract last traded at $6.10/kg.
Hurrell said the current market environment was "very fluid and uncertain".
"We are working with a lot of moving pieces when it comes to the milk price, including exchange rates which can fluctuate hugely.
"Something that many people may not know is that yes, the 2020-2021 season opens on June 1 but our forecast farmgate milk price for the new season is actually a forecast that includes looking right out to what's happening in August next year. That's why we can only confirm the final milk price for the 2020-2021 season in September 2021."
Because it has units listed on the sharemarket, Fonterra is obliged to reveal its forecasts to the market first.
Despite his prediction of $6.50 for the whole new season, ASB's Penny advised farmers to "dust off their business plans and be prepared for a low payout".
ASB Bank senior rural economist Nathan Penny. Photo / Supplied
"We don't know where demand will land. We're confident in the base [commodities] level of demand in that people need to eat, babies need infant formula and people need daily calcium. So we're happy with that - but not the more premium side of our exports."
In Fonterra's case that was its food service to global hospitality sectors and the consumer products business, which could be affected by Covid-19 impacts on global economies. Reduced returns in this area of the business would put Fonterra's dividend at risk, Penny said.
"There's relatively less risk around the milk price but there's still so much we don't know."
Penny said New Zealand was currently selling milk for $7/kg based on the New Zealand-United States exchange rate and latest auctions.
But achieving that price had needed a low kiwi dollar because commodity prices were low, he said. Also prices tended to be firmer at this time of the New Zealand season because milk production was drying up. Drought had also supported the price.
"We don't expect the $7 spot price to last. Some confidence may come back to the markets but there's a lot of caution with people not willing to commit in case prices come down.
"We see a lot more possible milk price outcomes than we normally would."
Another wildcard was the NZ-US exchange rate, he said.
