Economist: beware of a blip

Despite a suddenly brighter outlook, most farmers will probably be cautious on spending.

Despite an increased milk price forecast, dairy farmers are expected to spend conservatively throughout 2017, with the industry unlikely to see new investment until the end of the year, according to a leading economist.

Fonterra has announced that it would increase its 2016/17 forecast Farmgate Milk Price by 75 cents to $6 per kgMS.

Combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season was forecast to be $6.50 to $6.60 before retentions.

Economist Gareth Kiernan says Northland farmers would spend cautiously in 2017, despite an increased milk price forecast.

Following the year in which milk prices hit their lowest in at least 20 years, with DairyNZ estimating an average break-even point of $5.05/kg, one economist said the increase had not been expected to rise this high until 2019.

Gareth Kiernan, chief forecaster at Infometrics, the Wellington company which provides quarterly GDP reports to local authorities, said the forecasted price had tracked higher than anticipated.

"We had believed it would not reach that price until 2019," he said.

"We have to be careful and look at how sustainable the increase is," he said, adding that it was not uncommon for prices to shoot up before falling away again, with disappointing outcomes.

He said farmers had been borrowing to keep business ticking over and would remain cautious until the end of 2017, when they would be most likely to invest in growth.

The price increase reflected improvements in pricing since September, following the gradual rebalancing of global supply and demand, said Fonterra chairman John Wilson.

Fonterra's first quarter revenue of $3.8 billion was up 6 per cent on the same period last year.

Sales volumes were up 2 per cent to 4.9 billion litres liquid milk equivalent and the gross margin of 22 per cent remained largely unchanged.

"We've seen falling production in the major exporting regions, particularly Europe and Australia, and an unprecedented decline in New Zealand milk supply due to wetter than normal spring conditions across most regions," he said.

"On balance, demand continues to be firm. As a result there has been a steady improvement in global dairy commodity prices and this is reflected in the improved forecast."

He said farm incomes would be affected this year because of lower milk production.

" ... so we will be doing everything possible to build on our good start to the financial year and deliver the highest possible total payout to our farmers," he said.

Chief executive Theo Spierings said Fonterra's operating expenses had reduced by 2per cent to $621 million, and "the first quarter revenue gains reflected broad-based volume and margin growth across the business, and an ongoing focus on cost controls".

He said the co-operative's earnings face "emerging head-winds for the remainder of the financial year".

"Our current milk collection forecast is 1460 million kilograms of milksolids (kgMS), down 7per cent on last season, and this is constraining sales.

In addition there is a potential impact from the price of Milk Price reference products, such as whole milk powder, rising faster than non-reference products," he said.