Westpac economists are now seeing "stronger for longer" dairy prices and have hiked (by 75c) their forecast for the milk price to Fonterra farmers for next year to $8 per kilogram of milk solids.
The economists are already forecasting a milk price for the about-to-finish season of $7.90. If their forecasts were to be achieved for this year and next, it would represent the second, and third, highest payouts ever made by Fonterra to its farmer shareholders.
Fonterra is currently forecasting a milk price of between $7.30 and $7.90 per kilogram of milk solids for the current season - so implying a potential payout price based on the 'midpoint' of $7.60.
Global dairy prices remained at high levels in the latest GlobalDairyTrade auction this week.
Westpac senior agri economist Nathan Penny says he expects a "very modest" supply response to the high milk price by historical standards.
"As such we expect that dairy prices will remain stronger for longer."
He says New Zealand dairy supply is constrained for a range of reasons, including environmental constraints, strong competition for land and water, capital constraints, and labour constraints.
"As a result, we expect modest production growth next season of 2%. While this would be in addition to the 1% growth we expect this season, it is modest given the very healthy milk price. Indeed, following the record milk price in 2013/14 production grew a whopping 10% over the season."
Global supply is similarly constrained, Penny says.
"On the demand side, we expect robust demand to continue. As we have noted over recent months, strong Chinese and South-East Asian demand is underpinning the price strength and we expect this to be ongoing through 2021. Notably, we expect the Chinese economy to expand by 10% over 2021."