Fonterra raises milk price range to $9.20/kg mid point

Fonterra chief executive Miles Hurrell. Photo / NZ Herald

The rural sector continues to underpin New Zealand's economic resilience to the global pandemic with forecast dairy prices rising to record highs.

Fonterra has lifted its 2021/22 forecast farmgate milk price range to $8.90 - $9.50 per kg of milksolids, up from $8.40 - $9.00 per kg previously.

This increases the midpoint of the range, which farmers are paid off, by 50 cents to $9.20 per kgMS.

If the forecast comes to pass, it would be the highest milk price paid by the co-op in its two-decade-long history.

The previous record was in $8.40/kg in the 2013/14 season.

Chief executive Miles Hurrell said the new mid-point meant Fonterra would contribute $13.8 billion to the New Zealand economy this season.

"The increase is the result of consistent demand for dairy at a time of constrained global milk supply," he said in a statement.

"In general, demand globally remains strong – although, we are seeing this vary across our geographic spread," he said.

Overall, global milk supply growth was forecast to track below average levels, with European milk production growth down on last year and US milk growth slowing due to high feed costs.

It was a similar supply picture in New Zealand.

Earlier this month Fonterra reduced its forecast milk collections for 2021/22 from 1,525m kg of milksolids to 1,500m kg due to varied weather and challenging growing conditions.

Parts of the country - such as the Waikato - are drying out very quickly and production is also dropping quite quickly.

Data out yesterday showed that total production for December was down buy 5 per cent against the same month a year earlier.

Listen to Jamie Mackay interview Miles Hurrell on The Country below:

"While the higher forecast farmgate milk price does put pressure on our margins in our consumer and foodservice businesses, prices in our ingredients business are favourable for milk price and earnings at this stage," Hurrell said.

Hurrell said that as a result, Fonterra remained comfortable with its current 2021/22 earnings guidance of 25-35 cents per share.

He said there were a number of factors the Co-op was keeping a close eye on, including growing inflationary pressures impacting on operational costs, the increased potential for volatility as a result of high dairy prices and economic disruptions from Covid-19, particularly as governments respond to the rapid spread of the Omicron variant.

Westpac senior agri economist Nathan Penny said falling local milk supply was putting upward pressure on milk prices, meaning farmers were in a better financial position.

"Farm finances are looking good but, to a degree, higher costs are taking a chunk out of higher profits," he said.

Stronger oil prices were translating into higher fertiliser costs, and labour shortages were adding to farmers' wage bills, Penny said.