Fonterra raises milk price forecast to past break-even point

Fonterra said it had raised its 2016/17 forecast farmgate milk price by 50 cents to $5.25 per kg of milksolids.

Fonterra said it had raised its 2016/17 forecast farmgate milk price by 50 cents to $5.25 per kg of milksolids.

When combined with the forecast earnings per share range for the 2017 financial year of 50 to 60 cents, the total payout available to farmers in the current season is forecast to be $5.75 to $5.85 - before retentions.

The forecast compares with DairyNZ's estimate of break-even of $5.05 per kg.

Fonterra's chairman John Wilson said that since the co-operative last reviewed its forecast Milk Price in August, global milk supply has continued to reduce and demand has remained stable.

"Milk production in key dairying regions globally is reducing in response to low milk prices," he said in a statement.

Milk production in the EU for 2016 is beginning to flatten out and New Zealand milk collection is currently more than 3 per cent lower than last season.

"While we have seen some improvement in GDT auction prices recently, the high NZD/USD exchange rate is offsetting some of these gains," he said.

Fonterra's announcement, which followed a modest improvement in prices at this morning's GlobalDairyTrade auction, came largely out of blue, although the co-operative was expected to comment on the milk price at tomorrow morning's annual result.

"I think that Fonterra is probably aware of the cashflow constraints for farmers so they will do anything they can to aid that," ANZ Bank rural economist Con Williams said.

"Tomorrow morning's announcements will all be aimed at alleviating any short term financial stress for farmers."

Fonterra's move follows this morning's GlobalDairyTrade auction, which showed the GDT index rising by just 1.7 per cent - well short of market expectations.

Whole milk powder prices - which have the greatest bearing on Fonterra's farmgate milk price forecast - eased by 0.2 per cent to US$2782 a tonne after gaining by more than 30 per cent since July.

Williams said the decline in whole milk powder prices should not have come as a big surprise, given the extent of the rally since July.

"The market was showing signs of exhaustion," he said. However Williams said the rally looked to be more sustainable than previous upturns over the last two years.

"If we look at this morning's prices, I think the rally has more durability than the last ones we have seen over the last couple of years, and the news flow has been more supportive of that," he said.