Synlait picks dairy prices to start rising early next year

John Penno is the managing director of Synlait Milk. Photo / NZME.

Low value will slow the growth in world production, allow consumption to catch up.

Rakaia-based Synlait Milk has issued a low farmgate milk price for the current season but managing director John Penno says he expects prices to start improving by early next year.

Synlait pitched its first forecast for 2015/16 at $5.50/kg of milksolids and revised downward its estimate for the present season to $4.40-$4.60 from a previous forecast of $4.50-$4.70.

Last month, Fonterra forecast a $5.25 farmgate milk price for 2015/16 season, and lowered its 2014/15 price to $4.40 from $4.50.

"We are not really saying anything different to anyone else," Penno said.

"We think that $5.50 is our best estimate but we are estimating a long way forward.

"The exchange rate is better than it was 12 months ago, and we believe that commodities prices will begin to improve early in calendar 2016.

"We are not expecting an improvement any time soon, but certainly the market will correct."

Penno said low prices would slow down, or perhaps halt, the growth in world production, which would allow underlying growth in consumption to catch up.

He said the small recovery in commodity prices seen earlier had not delivered the stability which had been hoped for.

"We're very aware of how financially tough this current season is for our suppliers. We are confident commodity prices will recover over time and our 2015/2016 forecast milk price assumes we will see the beginning of this recovery from the current low prices," Penno said.

"The global oversupply is being met by soft demand across the board. This creates a lot of uncertainty in an already volatile market, so it will remain a fragile environment for the immediate future."

Factors contributing to the global oversupply include Russia's ban on dairy imports, the removal of dairy quotas in Europe and low demand from China.

Penno said Synlait has deliberately started advance rates higher than usual to assist farmers with cash flows through the early spring. They will return to normal levels based on the forecast milk price soon after.

Retrospective payments to suppliers for the current season remain unchanged until the final payment in October.

On a corporate level, Penno said the company was continuing to increase its infant formula volumes in line with it strategy of focusing on value-added businesses. Synlait shares closed down 8c yesterday at $2.65.

Last week's GlobalDairyTrade (GDT) auction registered a decline in prices for the sixth time in a row.

The GDT price index dropped by 4.3 per cent, driven by declines in butter and anhydrous milk fat.