Stable milk price crucial for strong farming season

Rabobank dairy analyst Emma Higgins. Photo / Supplied

Rabobank is picking a farm- gate milk price around $6.25 for the 2017-18 season, as it says a figure in that area would finally allow dairy farmers to ''emerge from the woods''.

Global dairy prices were now better balanced than at the start of this season.

This was likely to flow through and create largely stable commodity pricing in the new season, a bank report said.

However, despite the improved market balance, the possibility of further lifts to the current season milk price was limited, report author and Rabobank dairy analyst Emma Higgins said.

The price rally experienced since the second half of 2016 had ''some of the gloss'' removed, with stronger-than-anticipated New Zealand production impacting on prices.

The bank did not envisage much upside to the $6 milk price forecast by Fonterra for the final price of the 2016-17 season.

Despite recent increases in milk prices, the cash-flow benefit was only just seen in farmers' pockets.

This was due to lower early-season advance payment rates.

Another profitable season in 2017-18 was ''crucial'' to boost confidence in the sector, Ms Higgins said in a statement.

Depending on cost structures, a milk price of $6.25 would be profitable for the majority of New Zealand farmers and would provide a second year of healthy farmer margins.

Affordability of farm inputs was a further factor which would support farmgate margins next season.

Fertiliser and feed expenses looked set to remain comparatively low, the report said.

Ms Higgins urged farmers to ''proceed cautiously'', saying they needed to be conscious of the risk it may play out less positively.

Keeping cost control front-of-mind for the 2017-18 season would help to maintain positive margins at improved milk prices and maximise business resilience, she said.

Key risks to Rabobank's outlook included increased milk supply out of Europe and currency shifts stemming from political uncertainties in Europe.

Cow numbers in Europe fell just 0.2% between December 2015 and December 2016, which was significantly less than the drop in production over that period.

Even with cow reductions to take place in the Netherlands, there was certainly capacity for more milk to flow, she said.

Upcoming elections in France and Germany posed political uncertainty.

Upset in either had the potential to affect exchange rates with any weakening of the euro increasing the competitiveness of European exports.

The most significant upside to the outlook was the possibility of a sharp increase in New Zealand dairy exports to China.

''Chinese production has been struggling to keep pace with our low consumption growth forecast of 1% and stock levels are now very low.

''We see import growth of 20% year-on-year as a possibility for 2017 which would barely restore inventory levels,'' Ms Higgins said.

New Zealand was well positioned to play a lead role in providing product to China, particularly if other large whole milk powder-producing countries struggled to increase their output over 2017, she said.

ASB's latest Economic Weekly said New Zealand's recent bad weather would raise some question marks over the impact on dairy production.

At this point, it appeared the impact had been localised and small and major dairying regions had avoided the brunt.

There might be near-term challenges to harvesting maize and regrassing pastures but water sources had been replenished, potentially setting up for a good spring.