ASB ups NZ milk price forecast to $7.50/kg after GDT auction

Pressure is building on Fonterra's farmgate milk price after another strong dairy auction. Photo / File

ASB Bank has revised up its 2019/20 milk price forecast up by 50 cents to $7.50/kg, saying prices have moved to a new, higher, plateau.

Farmgate milk prices have only exceeded $7.00/kg three times before; 2007/8 ($7.59), 2010/11 ($7.60) and 2013/14 ($8.40).

In moving its forecast to $7.50, ASB also raised its long-run forecast range to $6.50/kg to $7.50/kg.

Fonterra has forecast the milk price to be in a $6.55 to $7.55 per kg range.

ASB rural economist Nathan Penny said he believed that milk price volatility had eased.

Global dairy markets are tight and NZ October production was 1.5 per cent down on October 2018.

Meanwhile, Northern Hemisphere production growth is also soft, with annual production growth only marginally above flat in both the EU and the US.

"In short, production growth in the key dairy exporters is insufficient to meet growth in global demand. Accordingly, global dairy prices are lifting," he said in a commentary.

Overall dairy auction prices have lifted 8 per cent since early September at a time when the spring flush normally forces prices lower.

The weaker New Zealand dollar is also helping - the currency has averaged US0.65c so far this season - materially down on the average over 2018/19.

Penny said he was bullish on the milk price prospects for 2020/21, setting its initial 20/21 milk price forecast at $7.50/kg.

Westpac, in its latest economic overview, revised up its farmgate milk price to $7.10/kg for the current season and $7.30/kg for the following season.

"Even then, we've maintained our caution on the strength of the Chinese consumer, and our forecasts allow for a modest pullback in world dairy prices over the first half of 2020."

In the past, milk payments at these levels would have incentivised dairy farmers to ramp up production.

"However, rising on-farm costs, concerns about regulatory changes such as the proposed freshwater standards, and tighter bank credit are expected to restrain farmers' expansion plans this time," Westpac said.'

The revisions follow another strong Global Dairy Trade auction.

Whole milk powder, which has the greatest bearing on Fonterra's farmgate milk price, rose by 2.2 per cent from the last sale early this month to US$3,321 a tonne - revisiting levels last reached in March this year.

Skim milk powder - another important reference product for Fonterra - gained by 3.3 per cent to US$3017 a tonne at the auction.

The fats were weaker - butter fell by 1.3 per cent to US$4061/tonne and anhydrous milk fat dropped by 1.5 per cent to US$5108 a tonne.

A $7.50 milk price would put it within striking distance of the highest ever milk price paid buy Fonterra - $8.40 a kg - paid in 2013/14.

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

Fonterra's milk price for the 2018/19 season came in at $6.35/kg.