Fonterra milk price forecast up on lower production

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Declining global milk production, including in New Zealand, has underpinned a milk price forecast boost by Fonterra yesterday.

Fonterra has continued to forecast a country-wide decline in production this season of 7%, while Waikato's late-October production was down by about 14%.

Fonterra increased its 2016-17 forecast farm-gate milk price up 75c yesterday, from $5.25 to $6 per kilogram of milk solids, with the forecast earnings per share in a 50c-60c range, taking the total payout to $6.50-$6.60, before retentions.

Announcing the lift yesterday, Fonterra also delivered its first-quarter update, with revenue up 6% to $3.8billion, sales volumes up 2% to 4.9billion litres liquid milk equivalent and the gross margin unchanged at 22%.

The forecast boost by Fonterra was expected by most analysts, following strong gains in this week's fortnightly Global Dairy Trade auction.

Prices for all products were higher and the overall prices gained 4.5%; the key milk powder price being up 3.2%, its highest level since mid-2014.

Westpac's acting chief economist Michael Gordon said since Fonterra's last update, prices in the fortnightly GlobalDairyTrade auctions, particularly for whole milk powder, had increased "significantly".

Westpac was keeping its forecast at $5.80/kg, but with more likelihood of raising it than lowering it.

Tighter domestic supply, following very wet weather in the Waikato and other parts of the North Island was a key factor supporting prices, with Fonterra reducing the volume of product available for the auction platform, Mr Gordon said.

Fonterra chairman John Wilson said the forecast lift reflected global pricing rises since September, following the gradual rebalancing of global supply and demand.

"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.

ANZ rural economist Con Williams said the 75c increase was not a deferred payment.

He said the increased forecast assumed some slight price moderation for the 40% of product yet to be sold, meaning Fonterra was being conservative.

"If prices maintain their current level there could be further upside of 20c-30c per kilogram of milk solids," he said.

simon.hartley@odt.co.nz