$8.00/kg milk price just 'a matter of time' - ASB's Nathan Penny

ASB's Nathan Penny says an $8.00 milk price is only a matter of time. Photo / Supplied.

It's just a matter of time before the New Zealand milk price hits $8.00 a kg of milksolids, ASB senior rural economist Nathan Penny says.

Fonterra's farmgate milk price forecast for the current season is for $7.00 to $7,60/kg, with a mid point of $7.30/kg - comfortably ahead of DairyNZ's estimate of break even of $5.95/kg.

An $8.00/kg milk price would be welcome sight for farmers, who face increased environmental compliance costs, tighter credit conditions and weakening dairy farm prices.

It would also give the Reserve Bank Governor Adrian Orr, who has in the past raised concerns about the high level of dairy farm debt, a better night's sleep.

But for Fonterra, milk prices are its greatest input cost, so an even higher price would create an extra headwind for the company as it seeks to trim down its operations and return it to profitability after last year's record loss.

At last December's earnings update, chief executive Miles Hurrell said the biggest pressure on the co-op's earnings would be the rising milk price.

ASB's Penny has a $7.50/kg milk price forecast for the current 2019/20 season, but he says the risks are skewed to the upside.

"We are going to have an $8.00 milk price, sooner rather than later," he said.

"It might not be this year, but there is a good chance that we will be there next year. If not, a year after that."

"It's not if, it's when," he told the Herald.

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 back to $6.12/kg in 2016/17. Around the time of its $8.40/kg peak, the New Zealand dollar was trading at around US87c.

In stark contrast, the New Zealand dollar averaged around US65.9c last year - low by recent historical standards - and providing a major shot in the arm for the agriculture sector.

"A New Zealand dollar at current levels is a bit of a game-changer for dairy and the agriculture sector in general," Penny said.

He noted that at the last upturn, the strength of the New Zealand dollar meant whole milk powder prices had to hit US$5000 a tonne to generate the record $8.40kg milk price.

"At US67c we only need to get to US$3500 tonne - which is very doable," he said.

At the last Global Dairy Trade auction, wholemilk powder traded at US$3150/tonne, up from just US$2700/tonne this time last year.

"The low Kiwi dollar is a big part of the story for the record prices in the other primary sectors - beef, lamb, horticulture and forestry," Penny said.

Tighter environmental regulations here and around the world have acted to constrain dairy production.

"Environmental constraints are global constraints, so farmers are getting focused on their own patch and the costs that they have to bear."

"If they can incorporate environmental costs better than their competitors offshore, then that will be an advantage for them," he said.

"They are not the only ones to face these pressures - it's more or less the same globally.

"It is a competitive question, not just a costs question."

In last year's financial stability report, the Reserve Bank said that despite above-average dairy prices and reasonable profitability for the dairy sector as a whole, a significant share of the dairy sector remained financially vulnerable.

Progress had been made by some borrowers in reducing debt and restoring balance sheet sustainability, the bank said.

"However, the most indebted farms have struggled to achieve profitability and repay debt," the report said.

At last December's update, Fonterra said that a $7.30/kg milk price - if it comes to pass - would be the fourth highest milk price in its near two-decade history, representing a $11.2 billion cash injection into the economy.