Westpac economists now see milk price of just $4.60 in 2017 as another fall in dairy prices looms in this week's auction

By David Hargreaves

Westpac economists have slashed their year-ahead forecast for the farmgate milk price to just $4.60 per kilogram of milk solids for 2017, as another fall in dairy prices looms in this week's global auction.

The Westpac economists have dropped their 2017 forecast by some 60c from their most recent pick of $5.20. If such a price ($4.60) eventuated next year then this would be the third consecutive season in which farmers have seen returns of under $5. Last year the price for Fonterra farmers was $4.40, while this season Fonterra's currently forecasting $4.15 - though this projection is already under severe pressure. See here for the full dairy payout history.

Futures trading has suggested there may be another overall drop in prices in excess of 5% at this week's GlobalDairyTrade auction in the early hours of Wednesday morning our time, with the key Wholemilk prices perhaps dropping as much as 10%.

ANZ recently slashed its milk price forecast for the current season to just $3.95, while it's now forecasting $5 for 2017.

Westpac economists have also trimmed their forecast for the current season, back to $4 from $4.20 previously.

But it's the increasingly pessimistic view of NEXT season's forecasts being taken by economists that will be of concern for farmers and bankers.

In their weekly commentary the Westpac economists say if they are right with their new forecasts, "it will mean many dairy farmers are staring down the barrel of three consecutive seasons of negative cash flow".

"This is likely to be another knock to fragile rural confidence. And with the latest Federated Farmers confidence survey showing that 43% of farmers already intended to reduce spending over the next year (compared with just 15% who expect spending to increase) even before the latest step down in prices, it probably won’t be long before the downbeat outlook is being reflected in confidence further afield. Increased concern about prospects for the global economy, financial market conditions and weaker dairy prices have all been identified by the Reserve Bank as downside risks to its policy outlook which may require “some further policy easing” over the coming year".

ANZ economists said in their weekly newsletter that while further price pressure is expected at this week's dairy auction, lower volumes, higher participation from Chinese buyers at the last auction, and already-low prices suggest the fall "may not be as large as implied by the futures market".

"That said, conducive weather conditions are reportedly seeing strong milk supply growth in Europe; some Chinese buyers could still be on holiday (New Year celebrations); and there has been an increase in the forecast volumes of SMP, AMF, butter and casein at upcoming auctions. The latter indicates the improved seasonal conditions for New Zealand milk supply and the preferred product mix (due to better returns)."

ASB economists are currently forecasting a milk price of $4.10 for this season and in excess of $6 for next year, but concede in their weekly newsletter that "if we see another price fall overnight on Tuesday, we will likely revise lower our current season milk price forecast as well as our 2016/17 milk price forecast".

Meanwhile, Fonterra announced today that it was decommissioning one of its powder dryers and turning more milk into "a range of high value products".

This is the full statement from Fonterra:

Fonterra Whareroa’s oldest powder dryer will take an extended break from April, as the plant is decommissioned to bolster the site’s value-added operations.

The temporary closure of the iconic dryer, known as ‘P1’, will see more milk turned into a range of high value products, including milk protein concentrate which is currently in high demand.

Fonterra Managing Director Global Operations, Robert Spurway says P1 has served the business well over the years but is coming to the end of its lifespan.

“P1 was one of the country’s flagship dryers when it was first opened in 1973, and has been an important part of our asset mix ever since. Over its 43 years, it has produced more than half a million metric tonnes of milk and protein powder.”

“However, as technology advances and markets continue to evolve, so too must our Co-operative.  We are constantly honing and improving our asset base in order to maintain operational excellence, achieve greater efficiencies and deliver on our value add strategy,” says Mr Spurway.

The P1 building will remain on the site, giving the option to re-open the plant in the future to help meet milk growth in the central North Island. Staff from the plant, as well as its machinery and technology, will assume new roles across the site’s nine other plants.

This project is part of a business-wide review to identify efficiencies and ensure the Co-operative is well-placed to respond in an increasingly volatile and competitive environment, says Mr Spurway.

“We have a responsibility to our farmer shareholders and our customers to be more efficient in all facets of our business, and projects like the one at Whareroa are helping us to identify areas where we can make significant and sustained cost savings.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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should've stuck with $3.95...

Seems we have come full circle from the "black Friday" $3.85 announcement, way back in August.

Why do Fonterra and the banks mostly insist the payout will be higher next season?
They have been saying that for the last couple of years and been entirely wrong.
I guess eventually it has to be true, but there is currently no evidence to support an increase in dairy commodity prices in the forseeable future as far as I am aware.

Totally agree....this promised increase never has any reason behind it....almost an incantation so as not to scare the horses but I dont think farmers are not swallowing it any more...

Forecast = expectation manipulation

nothing less nothing more.

A forecast is wrong by definition, but I think it matters. I would imagine it is much harder for Westpac to extend credit to farmers when their forward projections show the farm will continue to lose money (not forgetting many farmers will have to repay Fonterra loans also).

Perhaps it will feed into loss provisions as well.

"(not forgetting many farmers will have to repay Fonterra loans also)."
Calling Fonterras bluff on this one. Someone's gonna pay.

Fonterra have mothballed the new Pahiatua milk drier, the one they commissioned in August 2015.

Andrew not sure you know what you are talking about.The new plant is currently running(not at full capacity)

Had a friend working there told me they were going to mothball it, 2 weeks ago. Someone here commented that it was due to a cancelled order from Venezuela.
Pleased if they are not, the options involve a lot of freight.

They have form when it comes to accurate forecasting. We were wondering where the Temuka A&P society, lucky wheel had gone, I think it's in a banks basement in wellington and each month they pull it out and give it a spin and hope it doesn't land on the turkey.


However, economists generally saw this as a conservative estimate, with the belief that slumping world prices would recover somewhat. A popular pick for the season-ending price in the 2015-16 season has been around $5.70.

Great link with an enlightening set of comments. Looks like most of the commentators on this site have outperformed the bank's economists but that's not a surprise. The Pollyannas will continue to call most of us doomsters but I prefer the word realist.

Rumours on the Street in Canterbury one of largest multi farm companies about to topple into receivership.
Could this be the start of the big correction.
Keep your head down.

Yes I would believe that, plenty of farms are going to be pretty well at the end of their credit from the banks by the end of this season.
Next season will be disastrous for the dairy industry and NZ in general if the payout is sub $4.
Some farmers are talking about selling up to 50% of their cows and either going back to using system 1-2 or start running drystock on farm too.

some are being helped off.
receivers are being marshaled

Rumours on the Street in Canterbury one of largest multi farm companies about to topple into receivership.
Could this be the start of the big correction.
Keep your head down.

Don't like the sound of that Frank Brown! Doesn't seem like the general public really know what's going on? What are these agricultural reporters up to?

I am wondering how the Fonterra 50c/kg interest free loan thing is shaping up? My recollection of the terms were it was to be paid back when prices reached $6kg which is looking unlikely any time soon. Is this a material threat to Fonterra or is the co op itself likely to be doing better given its ingredients business margins benefit from lower input prices?

Dairy farmers in NZ paying 6%+ on interest on debt.
Dairy farmers elsewhere in the world paying 2% interest.
Level playing field?
Or part of a plan to sell NZ farms to foreign buyers?

how secure is the lending? If there is a 50/50 chance you won't get your money back options vanish.