News that Fonterra had upgraded its milkprice forecast for this year would be greeted with a "huge sigh of relief" from cash-strapped farmers, Federated Farmers dairy chair Chris Lewis said.

Fonterra has shifted its 2019/20 forecast farmgate milk price range up by 30c to $6.55 - $7.55 per kg of milk solids thanks to strong demand for whole milk powder.

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The advance rate Fonterra pays its farmer owners will be set off the mid-point, $7.05 per kgMS, of the revised range, it said, up from $6.75 previously.


Dairy NZ's latest estimate of the break-even point for most farmers is $5.95/kg.

"It is good news for farmers who have been feeling a lot of pressure of late," Lewis told the Herald.

"Finance has been very tight and some of the regulations - greenhouse gas and water - are weighing heavily on farmers' minds," he said.

"There has been huge mental pressure for farmers of late, and we are overdue for some good news, so it's a positive indicator as to where our season might end," he said.

"I can feel a collective sigh of relief today," he said.

Lewis and some economists expect the current month - when production typically hits its season peak - could show a slight decline.

"There is massive demand for our product but the supply might not be there," Lewis said.

Economists had been picking Fonterra's milk price would shift to the upper end of its range.


ASB rural economist Nathan Penny said has had a $7.00/kg forecast in place since January, but said there was a risk that it would be "$7.00 plus some change".

"The rate of production growth is slowing, which kind of fits our story," he said.

Latest production data from the Dairy Companies Association showed production on a milk solids basis for September was 220.98 million kg, up 0.7 per cent from the same month last year, but indicating a slowdown in growth relative to previous months.

Chairman John Monaghan said the co-op had been achieving good prices for its milk so far this season.

"Demand for whole milk powder has been firm, and for the full season we're expecting it to be above last year," he said.

Global wholemilk powder production is down year to date and expected to continue to decrease for the remainder of 2019, he said.


"We are also continuing to sell our skim milk powder at higher prices than EU and US dairy companies in Global Dairy Trade (GDT) events," he said.

Fonterra, which in September reported a record $605 million loss, has forecast earnings per share of 15 to 25 cents for the current year.

High milk prices can put pressure on Fonterra's margins because milk is the co-op's biggest input cost, but chief executive Miles Hurrell said he was comfortable with its underlying business performance.

The earnings guidance is based on a forecast farmgate milk price, which still falls within its new forecast range of $6.55 - $7.55 per kg, he said.

"The mid-point of the revised range does mean our teams will need to continue to push hard to achieve our margins, but so far we're comfortable with how this season is shaping up in terms of underlying business performance," he said.

Hurrell said there were positive signals for the milk price.


"It is still very early in the season and a lot can change. There are a number of factors we are keeping a close eye on, which is why we've retained a wide forecast milk price range," he said.

"These factors include global trade tensions and political instability in some of our key sales regions. And, as is always the case, we cannot predict the weather and clearly weather conditions play a big role in global supply," he said.

Economists' milk price forecasts for the current 2019/20 season have drifted higher, driven by constrained supply and a significantly lower New Zealand dollar.

Fonterra's milk price for the season just ended came in at $6.35/kg.

Economists said Fonterra's currency hedging arrangements could be more favourable to the co-op this season compared to arrangements put in place for 2018/19.

The New Zealand dollar last traded at US63.9c, down from close to US70c last December.


Fonterra's milk price hit a record high of $8.40/kg in 2013/14 before slumping to $4.40/kg in 2014/15, and to $3.90/kg in 2015/16.

The price bounced to $6.12/kg in 2016/17.