Fonterra has pitched its opening farmgate milk price for the 2018/19 season at $7.00 per kg of milksolids - one of its highest yet - and upgraded its milk price for the current season by 20c a kg.

If its forecast comes to pass, it will be the fourth time since Fonterra was established in 2001 that its milk price hit $7.00/kg or more.

However, milk is Fonterra's biggest input cost, so that will have a negative impact on the company's earnings and its dividend.

Fonterra increased its 2017/18 forecast for the current season, which ends on May 31, at $6.75 per kg, up 20c from the previous forecast.


The co-operative's NZX-traded units, which give investors access to its dividends, dropped by 4.5 per cent to $5.48 on the back of the announcement.

Chairman John Wilson said the strong opening milk price forecast for 2018/19 would be welcome news for the co-operative's farmers.

"What we are seeing is a continued positive global supply and demand picture which gives us the confidence to increase our current forecast farmgate milk price into the new season," he said in a statement. "Demand is expected to remain strong – especially from China and for butter and anhydrous milk fat," he said.

Wilson the co-op expects the global dairy market's current prices, especially for fats, to continue throughout the new season.

"We are also forecasting our New Zealand 2018/19 milk collections to be 1,525 million kgMS, a 1.5 per cent increase on our current forecast for this season, and we expect to see a lift in supply from the EU, US, Australia and Argentina," he said.

Wilson said the higher milk price is good news for farmers who are still recovering after the two years of lower milk prices in 2015 and 2016.

However, the higher milk price puts pressure on Fonterra's earnings in a year which is already proving challenging due to the legal settlement to French food group Danone and the impairment of the co-operative's Beingmate investment that the company detailed earlier this year.

As a result, Fonterra revised down its forecast normalised earnings per share guidance range down to 25-30 cents per share and our forecast dividend range for the full year down to 15-20 cents per share.


"The business' revised earnings forecast is disappointing for our shareholders and unitholders. However, the total forecast cash payout for farmers increases to $6.90-$6.95 per kgMS which is the third highest payout this decade," Wilson said.

Chief executive Theo Spierings said the earnings challenge that comes with the higher milk price was compounded by the timing and significance of this particular increase.

"There is always a natural lag in being able to pass through an increase in our input costs. But this increase has been both rapid and late in the year, making it difficult for these higher costs to flow through into our sales for this financial year," he said.

"Against this backdrop, we can see our sales margins are not where they need to be at this point in the year to achieve our original earnings forecast".

In its third quarter business update, Fonterra said its revenue of $14.8 billion for the first nine months of 2017/18 was up seven per cent on the same period last year, as a result of higher prices.

"In the first half of the year we felt the impact of the record low inventory followed by the low spring milk collections in New Zealand due to difficult weather conditions," he said.


"While the strong milk price is good for our farmers, it does make the remainder of the year challenging for the business," Spierings said.

Westpac senior economist Anne Boniface said she was surprised by the extent of the upgrade for the current season and the co-op's optimism about demand from China.

"We're not quite so optimistic that the recent pace of growth in demand from China will be sustained in the face of an expected noticeable slowing in the Chinese economy," she said in a commentary.

"Consequently, we are a bit more circumspect on the outlook for the milk price for next season, with a $6.40 milk price pencilled in," she said.

Fonterra's upgrade to the current season milk price, in particular, will come as welcome news to farmers who are facing a challenging time on many other fronts.

"There is more uncertainty about the outlook for the 2018/19 milk price this early in the season, and we would treat it with more caution," she said.


"However, a third consecutive season where most dairy farmers in positive cash flow territory should come as good news for New Zealand's agriculture sector."