Farmers milk it while the sun shines

Photo / Sarah Ivey

Good autumn weather has put Fonterra on track for record production and bodes well for the next dairy season, says the exporter.

Steve Murphy, general manager of milk supply, said production was more than 4 per cent ahead of the same time last year, when much of the country was experiencing dry or drought conditions.

Fonterra, which collected about 89 per cent of national milk production in 2009-10, is forecasting a payout for the 2010-11 season of $7.90-$8 per kilogram of milksolids before retentions - potentially a record result.

There are two weeks left in the season.

An $8 payout based on a 4 per cent rise in production could be worth about $10.7 billion - potentially $412 million higher than if production had been unchanged.

"Exceptionally favourable pasture growth conditions since January mean our farmer shareholders have enjoyed strong production around the country, particularly north of Taupo," Murphy said. "This is a real turnaround from earlier in the season when many of our farmers were struggling with a cold and wet spring.

"This, coupled with an early December drought, depressed production levels dramatically."

Farmers had coped with drought, floods and snowstorms, he said.

"But the recent excellent pasture growth has meant herds are now in good condition, which bodes well for calving and the new season's start."

Additional milk would be welcomed in the market where supply remained tight and prices for globally traded dairy products were at historically high levels, although they are off the price levels of early March.

BNZ economist Doug Steel is forecasting industry production in the coming season will rise by 4-5 per cent, reflecting some of the underlying growth from land still being converted to dairying.

"The associated increase in the number of cows and also the previous conversions still getting up to full speed ... should certainly put some increase on the board. But of course the amount of milk-solids per cow you get is very dependent on what the weather does."

BNZ was forecasting an industry potential payout of $6 to $7 for the coming season.

"Even then you probably couldn't guarantee that's where it will end up given the volatility that we've seen in commodity markets just over the last few weeks let alone what might happen going forward."

One of the differences between this and next season was the value of the currency, Steel said.

"Certainly the season just ending it's likely that Fonterra locked in the New Zealand dollar at substantially lower than where it is currently trading on the spot market ... but given where it's been over the last year or so any hedging done for the coming season is likely to be at a rate substantially higher than the one that's just ending," he said.

"That could certainly take something like a dollar or thereabouts off the payout figure just from that currency effect alone let alone any easing that we might see in product prices."

A 4.5 per cent rise in production for Fonterra next year on top of a 4 per cent rise this season with a $7 payout could equate to a potential payout of $9.8 billion.

The ANZ Commodity Price Index for dairy products dropped 2.6 per cent in April, having in March hit the highest level since May 2008.

ANZ said dairy products during the 12 months to March accounted for more than $11.6 billion out of a total $44.2 billion of overseas merchandise trade.