The milk's on the boil and farmers are set to benefit.
Fonterra Co-operative Group has increased and narrowed its forecast Farmgate Milk Price range to $$7.90 - $8.90 per kilogram of milk solids, from its previous forecast of $7.25 - $8.75 per kgMS.
Put in slightly more digestible terms, it means the 'midpoint' price, which is what farmers receive advance payments based on, has been lifted to $8.40 from $8.
At $8.40 it would equal the highest price ever paid, in 2014. At this point, however, there would appear every chance the $8.40 price will be exceeded.
Economists at both Westpac and ASB see the price reaching and in ASB's case exceeding, $8.50. It is something of a good news bad news story, however, as the price squeeze is being caused by falling production levels.
Additionally, the more Fonterra pays its farmers directly through the milk price, then so this puts pressure on its profit margins as obviously one of its key production inputs (milk) becomes much more expensive for it.
In commenting on the price forecast hike on Tuesday, Fonterra chief executive Miles Hurrell said the lift in the forecast was s a result of continued demand for New Zealand dairy relative to supply.
“At a $8.40 midpoint, this would equal the highest Farmgate Milk Price paid by the Co-op, and would see almost $13 billion flow into regional New Zealand through milk price payments this season.
“We have seen demand from China ease over the past couple of months, while other regions have stepped in to keep demand firm. On the supply side, overall global milk supply growth is forecast to track below average levels, driven by a slowdown in US production due to the increased cost of feed.
“These supply and demand dynamics are supporting the current pricing levels, and a higher contract rate has given us the ability to narrow the forecast range.
“While the increase in milk price can put pressure on our input costs, we remain comfortable with our current 2021/22 earnings guidance range of 25-40 cents per share.”
Hurrell said it is still early in the season [seasons begin in June], a lot can change, and there can be increased volatility when prices are high.
“This is why we’re maintaining a plus or minus 50 cents forecast range, reflecting the continued uncertainties at this point in the season.
“There are a number of factors we are keeping a close eye on that could impact demand. This includes the continued impact on global markets from COVID-19, growing inflation pressures, volatility in exchange rates, New Zealand weather conditions, and the potential impact of any geopolitical issues.”