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Milk price may rise with China's demand

NZ Newswire logoNZ Newswire 17/04/2017 Tina Morrison

New Zealand dairy farmers are likely to get a higher payout next season as global output remains subdued while demand picks up in China, according to agri banking specialist Rabobank.

The lender forecasts a farmgate milk price near $6.25 per kilogram of milk solids for the upcoming 2017-18 season, ahead of Fonterra Cooperative Group's $6/kgMS forecast for the current 2016-17 season, it's said in a report.

Rabobank doesn't anticipate much upside to the farmgate milk price for the current season due to stronger than anticipated production from New Zealand, it said.

Global dairy prices have started to pick up this season as demand and supply come back into balance after record high prices in the 2013-14 season spurred farmers to ramp up production, causing an oversupply which led to two years of weak prices below the level required by most dairy farmers to break even.

But Rabobank dairy analyst Emma Higgins, the author of the report, - titled New Zealand Dairy Sector: Out of the Woods - said greater market balance was likely to ensure a favourable farmgate milk price for next season.

"Milk output around the globe continues to remain low. While the speed of decline in milk production is slowing, it will take until the latter half of 2017 for volumes available for export to increase.

"On the demand side, we expect a significant uptick in Chinese dairy import volumes across 2017 and this will help to underpin whole milk powder markets," she said.

"These dynamics are set to keep global supply and demand largely in balance and, assuming a spot currency rate, we forecast the global market is in line to deliver a farmgate milk price near $6.25/kgMS."

The report said a milk price in this ballpark would allow New Zealand dairy farmers to "emerge from the woods" after a two-year period of depressed commodity pricing.

Fonterra paid farmers $3.90/kgMS for the 2015-16 season and $4.40/kgMS for the 2014-15 season.

Still, risks remain to the more positive outlook, including the chance of increased milk supply out of Europe and currency shifts stemming from political uncertainties in Europe, she said.

The most significant upside to the bank's outlook was the possibility of a sharp increase in New Zealand dairy exports to China.

"Chinese production has been struggling to keep pace with our low consumption growth forecast of 1 per cent and stock levels are now very low," Higgins said.

"We see import growth of 20 per cent year-on-year as a possibility for 2017, which would barely restore inventory levels," she said.

Dairy products are New Zealand's largest export commodity and Auckland-based Fonterra is the world's largest dairy exporter.

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