Higher Fonterra forecast means $10 billion boost for rural economy

Fonterra has raised the mid-point of its farmgate milk price forecast to $6.80/kg. Photo / Supplied

Fonterra said it had increased the mid-point of its forecast farmgate milk price range to $6.80 per kgMS, up from $6.40 per kgMS, driven by improved demand out of China.

The co-op left itself plenty of wriggle room by retaining its current plus or minus 50c per kg range but at $6.80, the price would be one of the highest paid by the co-op, adding $10 billion to regional New Zealand.

Fonterra's milk price hit a record high of $8.40/kg in 2013/14 before slumping to $4.40/kg in 2014/15, and to $3.90/kg in 2015/16.

The price bounced to $6.12/kg in 2016/17 and has generally stayed around the low to mid $6.00 region since then.

Dairy NZ's estimate of break-even is $5.80 to $5.90 a kg.

Chief executive Miles Hurrell said that despite the initial impact of Covid-19, Fonterra had seen demand for dairy in China recover quickly.

In particular, demand for whole mlk powder - a big driver of milk price - had been stronger than expected.

"While it is still early in the season, dairy prices have improved from the levels we saw on Global Dairy Trade (GDT) through the first wave of Covid-19 and demand for milk powders has proved resilient," he said in a statement.

"We have seen this demand reflected in GDT auctions, with prices trending upwards in recent events and this is supporting our decision to lift the range and its mid-point, which farmers are paid off."

Hurrell says there are a number of factors the co-op was keeping a close eye on, which was why it was retaining a wide forecast range of $6.30 - $7.30 per kgMS.

"It is still relatively early in the season and a lot can change," he said.

"For example, we could experience volatility with exchange rates, milk supply from the EU and US is increasing and there continues to be uncertainty around how a potential risk from further waves of Covid-19 and a global economic slowdown could impact demand," he said.

Hurrell said there were still a number of risks, which meant farmers needed to be cautious in their decision making.