Dairy forecasts upgraded on auction lift

Fonterra's reduced offerings at the latest auction contributed to a lift in dairy prices. Picture / Bloomberg

Two big banks have upgraded their farmgate milk price forecasts after a modest gain in product prices at the latest GlobalDairyTrade auction.

As the peak of the season fast approaches, a wetter-than-normal spring has affected production - particularly in the dairy heartland of the Waikato - which helped drive prices up at yesterday's auction by 1.4 per cent overall and by 2.9 per cent for whole milk powder.

ANZ has revised up its farmgate forecast to $5.25-$5.50 a kg of milksolids from its previous forecast of $4.75 to $5.00/kg and Westpac lifted its forecast to $5.30/kg from $5.00/kg. Both forecasts are broadly consistent with Fonterra's farmgate milk price forecast of $5.25/kg.

ASB Bank, which kept its forecast at $6.00/kg, expects to see a 5 per cent decline in national production over the year.

"And on this basis, we expect dairy prices to continue their rise over the season," said ASB rural economist Nathan Penny.

A key catalyst for the lift in prices in the auction was the reduced offerings by Fonterra.

Yesterday's gain partly offset the previous sale's 3.0 per cent decline in the GlobalDairyTrade (GDT) index, which occurred after a sharp spike higher over August and September.

The futures market had pointed to prices stabilising at the latest auction after Fonterra said it would reduce the amount of product available for sale because its Waikato milk volumes for October were down 10 per cent from the same time last year due to a wetter-than-usual spring.

ANZ rural economist Con Williams said the market looked to be consolidating, supporting the bank's view that $5.25-$5.50/kg mark should be achievable in 2016/17. Much would depend on how supply dynamics evolved from here, he said.

"With the catalyst for lower GDT supply being wet weather conditions in the Waikato, it appears buyers are prepared to take a wait-and-see approach for now," Williams said. He expected supply to remain restricted.

Westpac said that while prices were not as strong as potentially they could have been, they still provided enough of an indication that prices were set to remain higher than the bank had assumed over the next few months.

"Consequently, we have upgraded our farm gate milk price forecast for this season to $5.30," said senior economist Anne Boniface.

Fonterra last month raised its farmgate milk price by 50c to $5.25/kg of milk solids - its highest point in two years and its second upgrade in less than a month.

Combined with the forecast earnings per share range for the 2017 financial year of 50c to 60c, the total payout available to farmers in the current season is forecast to be $5.75 to $5.85/kg, before retentions.

That compares with DairyNZ's estimated break-even point of $5.05/kg. The milk price came to $3.90/kg in 2015/16, $4.40 in 2014/15 and a hit a record $8.40 in 2013/14.