Farmers brace for a likely cut in Fonterra's milk price

Economists say a farmgate milk price closer to $6.00/kg looks likely. Photo / File

A cut in Fonterra's farmgate milk price forecast looks likely when the co-operative issues its first quarter update on Thursday.

Economists say a farmgate milk price closer to $6.00/kg looks likely, particularly given the sharp increase in production in the season to date.

In October, Fonterra cut its farmgate milk price to a range of $6.25-$6.50 per kg of milksolids from an earlier forecast of $6.75/kg, but whole milk powder prices have continued to slide since then.

The possibility of lower dairy farm returns comes at a time of high debt levels for the sector.

The Reserve Bank, in its latest financial stability report, said debt levels remained high in the agriculture sector, particularly for dairy farms, and that balance sheets needed to be further strengthened.

Heavy rain, particularly in the South Island, has reduced the risk of drought this summer, and conditions so far this season have been highly conducive for milk production, which in turn has put downward pressure on prices.

"It (the rain) does set us up for a good start to the summer," ASB senior rural economist Nathan Penny said.

"We are looking at strong production through November, December and into the New year, so for us we think we could be in for a small drop (in prices)," he said.

Whole milk powder prices have declined steadily from the year's peak of US3311 a tonne in April to US$2599/tonne late last month, a fall in 21.5 per cent.

Year-on-year, October milk production was up 6.5 per cent on a milksolids basis while season-to-date NZ milk production rose by 6 per cent.

If the current trend continues, the season could see the highest milk production ever recorded, eclipsing the previous record set in the 2014/15 season.

Production in New Zealand typically peaks in October but remains strong in November, December and January.

"Even though we have passed the peak of the whole milk powder on offer, what is still on offer is well ahead of this time last year," Nigel Brunel director- financial markets at OM Financial said.

"They (Fonterra) may remain a little bit hopeful, but I don't think you will see $6.50/kg this year, that's for sure," he said.

Brunel expects whole milk powder prices to continue to ease.

"That's just a reflection of the fact that we have had a great season and there is more whole milk powder on offer from what was on offer at the same time last year," he said.

Brunel said it had been an orderly decline so far this year and not "massively volatile" as it had been in previous seasons.

The New Zealand dollar is also running against exporters at moment.

By late afternoon, the Kiwi was at US69.47c, up about US4c since early October, but down from its high for the year of around US73.8c.

Fonterra is the throes of taking stock of its portfolio and is looking at all its major investments, assets and joint ventures.

In September Fonterra, reported a net loss of $196 million for the July year - its first annual loss since its inception in 2001.

The co-op did not pay a final dividend, leaving shareholders with just the 10c/share interim dividend paid in April.

Last season's milk price ended up at $6.69/kg.

DairyNZ's estimate of break-even for the average dairy farmer sits at $5.40-$5.50/kg.