Fonterra cuts 2018/19 milk price forecast to $6.75/kg

Fonterra has lowered its 2018/19 milk price forecast. Photo/NZ Herald.

Fonterra has cut its farmgate milk price forecast to $6.75 per kilogram of milk solids.

The previous forecast was $7.00 per kg.

Fonterra chairman John Monaghan said the change was in response to stronger milk supply signals coming from some of the world's major dairy producing regions.

"Over the past quarter, we have seen increased milk supply out of markets including Europe, the US and Argentina. These regions have a big influence on the supply and demand balance and therefore global prices. For example, the one per cent increase in US milk production represents just under 1 billion litres of extra milk," he said.

"At the same time, demand for whole milk powder and dairy fats is showing signs of slowing in some parts of Asia, Africa and the Middle East," Monaghan said.

A weaker Kiwi dollar only partially offset the decline in global dairy prices but Fonterra chief executive Miles Hurrell said it was important to give farmers a realistic appraisal.

The co-op, under its DIRA legislation, has to update its milk price every three months.

The last forecast for 2018/19 was issued late in May.

Analysts and economists were expecting a cut and ASB's Nathan Penny said earlier this week that the market consensus was around $6.40 to $6.50 kg.

At that level, though, the majority of farmers would still be in the black, Penny said.

At the last GlobalDairyTrade (GDT) auction whole milk powder - a key driver of the milk price - traded at US$2833 a tonne - down 10 per cent on its June traded price.

Earlier this month, Fonterra announced a revision to its forecast for the 2017/18 just passed, shaving 5c off the price to $6.70/kg in order to support the co-op's balance.

Milk is Fonterra's biggest input cost and high milk prices, while beneficial to farmers, can hurt the co-op's bottom line.

Fonterra's balance was already under pressure from the legal settlement to French food group Danone and the impairment of its investment in China's Beingmate.

The co-op said at the time that $6.70/kg remained a strong milk price, historically.
The next GDT auction is due on Wednesday.

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