Economists see New Zealand farmgate milk price at $6/kgMS

Volatility in prices will keep farmers cautious about spending. Photo/File

Economists generally expect New Zealand farmgate milk prices to level out at around $6 per kg of milksolids for the remainder of this season and the next.

At that level, farmgate milk prices would be above Dairy NZ's break-even point of $5.05kg/MS and would likely result in farmers paying down debt incurred over the previous two seasons, when the milk price ducked below break-even, economists said.

Rabobank senior analyst Michael Harvey said the bank does not expect to see much upside Fonterra's forecast of $6kg/MS for the current season, which ends on May 31.

"It's a matter of prices remaining range-bound for the rest of the year," Harvey said.
"We have had a decent recovery in prices and there might be a little bit of upside from here, but not much."

Westpac expects to see some "upside risk" to its forecast for 2016/17 of $5.90kg/MS, and the bank has a forecast of $6.10kg/MS for next season.

"We do think that the global supply backdrop has started to improve," said Westpac economist Sarah Drought.

"It's a moderate outlook rather than something stronger," she said, adding farmers were likely to focus on debt repayment in the near term.

"Ongoing volatility in prices will keep farmers cautious about their spending behaviours," she said.

ASB Bank rural economist Nathan Penny expects prices for the rest of the season to hold at $6.kg/MS but, based on what he expects to be modest growth in supply and demand, is looking at $6.75kg/MS for next season.

New Zealand is the world's biggest exporter of dairy products, so production trends here have a bearing on world prices.

"If New Zealand farmers are aggressive, and there is a production result, then prices would change, and that's a risk," Penny said.

ANZ rural economist Con Williams has adjusted his forecast down to $6.10 to $6.15kg/MS for 2016/17 from his previous forecast of $6.25kg/MS.

He said steady production and improved returns would make for a more favourable total revenue and profit environment for farmers.

"Focus is turning toward the opening milk price forecast and advance rates for 2017/18, as these will set the tone for farm spending," he said in a commentary.

Williams expects the opening forecast for 2017/18 to be in the high $5 range and for prices to remain volatile.

A big focus will be debt repayment from the poor 2015/16 season, he said. The sector had accumulated about $1.50kg/MS of debt during this period and this would need to be reduced, Williams said.

Latest data from the Dairy Companies Association of NZ showed local production is down but not by as much as previously forecast, due to better-than-expected growing conditions.

Production for the 12 months to February was down by 2.3 per cent, the association said.