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Fonterra likely to lift milk payments

NZ NewswireNZ Newswire 18/05/2016 Tina Morrison

A worker in a milking shed on a Waikato dairy farm. © Brendon O'Hagan/Bloomberg A worker in a milking shed on a Waikato dairy farm.

Fonterra is expected to lift its farmgate milk price payout to farmers next season, although it's likely to mark the third year of prices below the level required by most farmers to break even.

The company is scheduled to hold a board meeting on Tuesday and Wednesday of next week, and may release its opening milk price forecast for the 2016/17 season early Thursday morning. Analysts in a BusinessDesk survey expect a payout of at least $4.43 per kilogram of milk solids for next season, up from a $3.90/kgMS forecast payout for the 2015/16 season, and from $4.40/kgMS in 2014/15.

DairyNZ estimates the average farmer required $5.25/kgMS to cover costs this season and hasn't yet finalised a break even price for next season.

"Clearly much can happen in the more than 12 months before the 2016/17 payout is finalised," Westpac senior economist Anne Boniface said in a note.

"However, at this point, our view remains that a sustained improvement in dairy prices will be a story for 2017."

Estimates for Fonterra's payout for the upcoming season range between $4.43/kgMS and $6/kgMS, with three of the forecasts around $4.60/kgMS, according to a BusinessDesk survey of six agricultural economists and dairy market analysts.

ASB Bank rural economist Nathan Penny is the most optimistic, saying he expects Fonterra to set an opening forecast of $4.80/kgMS, "aiming towards the higher end of the prevailing market view in order to support farm cash flows". Penny expects the payout will lift to $6/kgMS by the end of the season.

The price for whole milk powder rose 3 per cent to US$2,252 a tonne at the GlobalDairyTrade auction overnight, although remains below the long-term average price of US$3,050 a tonne.

"With dairy incomes set to remain under intense pressure for a third consecutive season, dairy debt is rising strongly" as farmers look to bridge the gap between revenue and expenditure, said Westpac's Boniface.

"The longer dairy prices remain low, the more pressure on the sector is building. Increasing debt will only fill the gap temporarily. Ultimately debt will need to be repaid, and in the meantime, higher debt levels leave the sector more vulnerable to negative surprises."

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