Fonterra Lifts Milk Price Forecast as Global Glut Wanes

Updated on
  • Kiwi dollar climbs as rising prices point to stronger economy
  • ‘Global milk prices remain at unrealistically low levels’

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, raised its forecast milk payout for the current season after prices jumped at auction, adding to signs a global oversupply is starting to wane.

Auckland-based Fonterra on Wednesday lifted its estimated farmgate milk price by 50 NZ cents to NZ$4.75 ($3.47) a kilogram of milksolids for the season ending May 31, 2017. The company maintained an earnings-per-share forecast of 50-60 NZ cents, taking the total payout available to farmers to between NZ$5.25 and NZ$5.35 a kilogram.

“Current global milk prices remain at unrealistically low levels, but have started to improve as global demand and supply continue to rebalance,” Chairman John Wilson said in a statement. “Milk production is reducing in most dairying regions globally in response to low milk prices and this is bringing the world’s milk supply and demand back into balance.”

The increased forecast will bring some relief to New Zealand dairy farmers, most of whom are operating at a loss after milk prices plunged amid the global glut. While today’s estimate is an improvement on last season’s payout of NZ$3.90 a kilogram, which was a nine-year low, it is still well below the record NZ$8.40 in 2013-14.

Firmer Kiwi

The New Zealand dollar rose on Fonterra’s statement and bought 73.17 U.S. cents at 11 a.m. in Wellington from 73.12 cents beforehand. Whole milk powder prices surged 19 percent at the last fortnightly GlobalDairyTrade auction Aug. 16.

Fonterra’s announcement was not scheduled, “but it comes as no surprise given the extent of the improvement in world dairy prices in recent weeks,” said Michael Gordon, acting chief New Zealand economist at Westpac Banking Corp. in Auckland. “We recently revised up our milk price forecast to NZ$5 per kilogram, which we regard as a cautious estimate.”

ASB Bank said it continues to expect a final milk price of NZ$6 for this season.

Wilson said while prices have increased on GlobalDairyTrade, the strength of the kiwi dollar, which has gained 8.6 percent the past three months, “continues to offset some of these gains.”

“We expect the dairy market to be volatile over the coming months and will continue to keep our forecast updated for our farmers as we move into the season,” he said.

(Updates with economist’s comment in sixth paragraph.)
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