Fonterra sticks with $4.70 farmer payout

After plummeting by 50 per cent last year, dairy prices look to have turned the corner.

Fonterra has stuck with its $4.70 per kg farmgate milk price forecast for the 2014/15 season and its forecast cash payout of $4.95 - $5.05 a kg, surprising some in the market who had expected a minor upgrade.

The cooperative, the world's biggest diversified milk processor, said that although dairy commodity prices had gone up, the increase was not sufficient to raise the forecast milk price.

The last five GlobalDairyTrade (GDT) auctions have shown price improvements after prices dropped by 50 per cent last year.

"Since December, GDT prices for whole milk powder have increased 45 per cent and skim milk powder prices have increased 13 per cent," chairman John Wilson said in a statement.

"There continues to be significant volatility in international commodity prices," he said.

"New Zealand volumes are down, with continued uncertainty in milk production due to climatic conditions in New Zealand with droughts in Canterbury, Marlborough, Central Otago and North Otago," he said.

Wilson said Fonterra was advising farmers to continue to be cautious with their budgeting.

At $4.70 per kg of milksolids, prices remain well below the estimated $5 per kg average cost of production.

Many in the market had expected a mild upward revision to $4.80, while ASB Bank had picked an upgrade to $5.00 a kg.

"The surprise comes as overall dairy auction prices have surged by 29 per cent since the Fonterra's previous forecast update in December," the bank said.

Fonterra maintained the dividend forecast for the current season at 25 to 35 cents but ASB said this too had potential to be upgraded on March 25, when Fonterra releases its first half result.

ASB noted the New Zealand dollar had gone as low as US72c in February.

"But whether or not Fonterra has been able to take advantage of the lower NZ dollar remains an open question, and may offer some explanation for the today's lower than expected forecast," the bank said. ASB has maintained it forecast at $5.00/kg for the current season and last week lifted its 2015/16 forecast by 50 cents to $6.50/kg.

New Zealand is the world's largest exporter of dairy commodities, representing about one third of international dairy trade each year.

See recent movements in world dairy prices here: