Fonterra plays safe, maintains wide milk price forecast for 2019/20

Fonterra has maintained its wide $6.25 to $7.25/kg of milksolids milk price. Photo / File

Volatile commodities markets have convinced Fonterra to maintain a wide $6.25 to $7.25 per kg milk price forecast for 2019/20.

Chairman John Monaghan said the board had reviewed the 2019/2020 milk price, in line with regulations.

"We have maintained the current forecast range of $6.25 to $7.25 per kg, and the advance rate schedule, which is set off $6.75 per kg," he said.

"It is still early in the season with around 2 per cent our forecast full season milk volume collected to date, so we are retaining a range of plus or minus 50c per kgMS," he said.

"As the season progresses and we get greater certainty on production and sales, this range will narrow," Monaghan said in a statement.

ANZ rural economist Susan Kilsby said the wide range came as no surprise.

"It is really early in the season and global volatility is heightened this year, relative to what we have seen in previous years, so it's another reason to keep the range that wide," she said.

ANZ has a $7.10 kg milk price forecast for this year.

Wholemilk powder prices, which form the base of Fonterra's milk price, weakened in the first few months of the year before bouncing back in July.

Farmer-funded Dairy NZ's latest estimate of breakeven is $5.95 per kg of milk solids.

The Reserve Bank, in its latest financial stability report, said breakeven for farmers at the very high end of the debt scale was $6.20/kg.

Monaghan said the global dairy market remains largely in balance, "but is not without some risk".

"We are keeping a close eye on international trade tensions and geopolitical risks," he said in a statement.

The weakening Chinese yuan meant less consumer purchasing power for USD-priced dairy products like Fonterra's.

There was also continuing volatility in the price of dairy fat but good demand for whole milk powder (WMP).

"Global milk supply growth is slowing and international WMP production expectations are falling," he said.

Fonterra will announce the final 2018/19 milk price at its annual results on September 12.

In a separate statement, Hokitika-based Westland Milk forecast a $6.75/kgMS milk price for the current 2019-20 season.

The company – which since August 1 has been wholly owned by Hongkong Jingang Trade, a unit of the Chinese dairy giant Yili – said the prediction was based on the midpoint of Fonterra's range.

Westland's 2019/20 prediction compares with a final confirmed payout in the 2018/19 season, under the former co-operative structure, of $5.86 per kg.

A strong milk price is good for farmers but for Fonterra itself, they represent an increased cost for the co-op's biggest input - milk.

Fonterra is next week expected to report a bottom line loss of up to $675 million for the year just finished, thanks mostly to $820m to $860m in writedowns of various businesses in several countries.

It will be only the second time the co-op has turned in a loss since it was formed in 2001. Its first loss - last year - came to $196m.

The co-op said it would not pay a dividend for the year to July 31 so that it could pay down debt.

Fonterra's NZX-listed units, which give investors access to its dividend flow, last traded at $3.31. The price has dropped by 33 per cent over the last 12 months.