What farmers can expect from Fonterra's Q3 update

Fonterra chief executive Miles Hurrell. Photo / NZ Herald

Dairy farmers can expect a sharply lower milk price forecast for the 2020/21 season when Fonterra releases its latest update tomorrow.

Futures market pricing suggests a 2020/21 milk price of $6.14 a kg of milksolids but some economists say it is more likely to have a $5 in front of it.

Rabobank expects a $5.60/kg for the season ahead and ANZ - the country's biggest rural lender - has predicted $5.75/kg.

ASB sees $6.50 but has said farmers should prepare for the possibility of a sub-$6 price. Westpac is looking at $6.30/kg.

For the season that is just about to end on May 31, the co-op has predicted a $7 to $7.60/kg milk price.

Economists are confident Fonterra will deliver within that range, albeit at the lower end.

Contrary to market expectations, Global Dairy Trade prices have been holding up at recent auctions.

At this morning's GDT auction, whole milk prices were steady at US$2677 a tonne while skim milk powder prices shot up by 6.7 per cent to US$2549 a tonne.

Rabobank senior dairy analyst Michael Harvey said that despite the positive auction, the bank had kept its season ahead forecast at $5.60/kg.

"We need to see commodity prices fall further than they have so far, so that is still to come," Harvey said on NZME's The Country radio show.

Harvey sees significant demand weakness and loss of sales through the food service channel as a result of the Covid-19 pandemic.

"But then you have to factor in the income drag because we are going to be going through a deep recession globally," Harvey said.

"It was a good result last night but we have not moved away from the fundamental view that there are some big imbalances in those markets in the month ahead for the global dairy market."

Fonterra will also release its third quarter business update at tomorrow's release.

Fonterra will deliver its third quarter update tomorrow. Photo / NZ Herald

In March, Fonterra delivered a lift in its interim earnings but chief executive Miles Hurrell said there was more work to be done to get the co-op back in shape after suffering a $605m loss last year.

For the full year to July 31, the co-op has past maintained its full-year earnings forecast of 15 cents to 25c a share.

The co-op as been selling assets, reorganising its operations and reducing debt as it adopts a back-to-basics approach. It is selling down its minority stake in China's Beingmate and has its China Farms and its share of a Brazilian joint venture on the block.

In April, chairman John Monaghan urged the co-op's farmers to be cautious about their on-farm investment decisions over the year ahead due to the uncertainty posed by the Covid-19 pandemic.

"It's clear that the Covid-19 outbreak will continue to have an impact on the health and wellbeing of people and economies across the globe for an extended period, likely deep into 2021," Monaghan said a message to farmers.

"Our co-op is better placed than a lot of other industries, but we are still being impacted," he said at the time.