Dairy gets its mojo back after Fonterra ups milk price forecast to $6.15/kg

Fonterra has issued its first farmgate milk price forecast for 2017/8.

Fresh on the heels of a price slump, dairy has its mojo back with two improved farmgate milk price forecasts from New Zealand's biggest co-operative, Fonterra.

Fonterra raised its farmgate forecast for the current year to $6.15 per kg of milksolids from a previous forecast of $6/kg, and has pitched its opening milk price forecast for the coming 2017/18 season at $6.50/kg.

Combined with Fonterra's forecast dividend of 40c a share, farmers can look forward to a $6.55 payout for the year to July 31. The improved forecasts follow two very poor seasons in 2014/15, and 2015/16, when dairy farmers struggled to break even.

"Dairy has its mojo back," ASB rural economist Nathan Penny said.

"Fonterra's 2017/18 opening milk price of $6.50/kg all but confirms that this is the case.

"Indeed at this level, a clear majority of farmers are setting up for a season in the black."

The co-op also confirmed its forecast earnings per share range of 45 to 55 cents for the 2017 financial year.

Fonterra's chairman John Wilson said the increased milk price forecasts reflected the strong fundamentals supporting global dairy markets.

"World dairy prices have risen in recent months and as we near the end of the season we have more visibility and certainty which makes us confident of our $6.15 position," Wilson said.

"Some of the challenges we faced in the third quarter could continue, but the business is committed to a strong fourth quarter particularly in Ingredients sales. This means we have been able to confirm the earnings per share range."

Fonterra said stronger production in March and April has partly offset lower peak milk production and collections are now expected to be down 3 per cent for the season, compared with an initial forecast of a 7 per cent decline.

The co-op's revenue of $13.9 billion for the first nine months was up 8 per cent in the same period last year, as a result of higher milk prices.

Chief executive Theo Spierings said Fonterra's "volume to value" strategy continued to drive its performance in the Ingredients and Consumer and Foodservice businesses.

"Margins in most of our businesses are similar to last year, and we have moved an additional 350 million liquid milk equivalent (LME) into higher value products in the year to date," he said. Consumer and Foodservice volumes in Greater China grew by 40 per cent in the period.

Spierings said Fonterra was on track to exceed its target of moving an additional 400 million LME into higher value products by year-end.

Fonterra said it expects its gearing ratio to be in the target range of 40-45 per cent by the end of its financial year.

Prices for whole milk powder - which have the greatest weighting on the farmgate milk price - last traded on Fonterra's GlobalDairyTrade auction platform at US$3312 a tonne, up from US$2205/tonne this time last year but down from last December's peak of US$3312/tonne.

Farmgate milk prices have been extremely volatile in recent years, hitting a record high of $8.40/kg in 2013/14, then dropping to $4.40/kg in 2014/15 before falling further to $3.90/kg in 2015/16.

Dairy NZ's estimate of break-even for most farmers is $5.05/kg.