World dairy markets look to be stabilising after a tumultuous few years, says Fonterra chief executive Theo Spierings.
Much to the relief of cash-strapped farmers, Fonterra has moved to increase its forecast for the current season, which ends on May 31, to $6.15 per kg of from $6.00 - and a world way from the initial forecast of just $4.25/kg, and the previous two seasons of below break-even prices.
In addition, Fonterra's opening forecast for 2017/18 of $6.50/kg was above most analysts' expectations. Economists see the price ending 2017/18 at $6.75/kg.
Fonterra said its forecasts were a reflection of its confidence in the market outlook.
"My prediction is that we are going into a relatively stable environment for quite a period of time," Spierings told the Herald.
"We are in a good place but we don't want to be complacent because the world is changing at an extremely rapid pace and we need to be on our toes all the time," he said.
In terms of globally traded dairy product, Springs said the supply picture looked stable.
Demand out of China, South East Asia and Latin America was strong," he said.
"If Russia was to open up all of a sudden, then you could see a price spike."
Russia has been off the agenda for dairy thanks to an import ban placed on western producers imposed in 2014.
Federated Farmers said that based on Fonterra's forecast and current production cycles about an extra $280 million dollars was expected to flow through the New Zealand dairy sector and wider provincial communities this season.
"If you take on board the amount of milk we are producing at present this means the average dairy farm in the country will be around $23,000 dollars better off," said Federated Farmers dairy chair Andrew Hoggard.
Next year was promising with Fonterra predicting a payout at about $6.50/kg, with a potential injection of a further $650m into provincial economies, but dairy farmers would be mindful of the unstable nature of the markets where prices fluctuate at short notice, he said.
DairyNZ's chief executive Tim Mackle said it may take three or four seasons of good milk prices for farmers to recover financially after taking on additional debt to get through the downturn.
Prices for whole milk powder - which have the greatest weighting on Fonterra's the farmgate milk price - last traded on Fonterra's GlobalDairyTrade auction platform at US$3312 a tonne, up from US$2205 a tonne this time last year.
Spierings said Fonterra could comfortably handle a deviation of plus or minus US$1000 a tonne from the long-run average of US$3500 a tonne for whole milk powder.
Combined with Fonterra's forecast dividend of 40c a share, farmers can look forward to a $6.55 payout for the year to July 31.
Fonterra's chairman John Wilson, commenting on the co-op's financial performance, said said some of the challenges faced in the third quarter could continue.
He said the business was committed to a strong fourth quarter particularly in ingredients sales. Stronger milk production in March and April has partly offset lower peak milk production and collections are now expected to be down 3 per cent for the season, compared with an initial forecast of a 7 per cent decline.
The co-op's revenue of $13.9 billion for the first nine months was up 8 per cent on the same period last year, as a result of higher milk prices.
Spierings said Fonterra's "volume to value" strategy continued to drive its performance in the ingredients and consumer and foodservice businesses.
"Margins in most of our businesses are similar to last year, and we have moved an additional 350 million liquid milk equivalent (LME) into higher value products in the year to date," he said.
Spierings said Fonterra was on track to exceed its target of moving an additional 400 million litres of liquid-milk-equivalent into higher value products by the year's end.
Fonterra said it expected its gearing ratio to be in the target range of 40-45 per cent by the end of its financial year.