ANZ and Westpac upgrade next season's NZ milk price forecasts

Farm gate milk prices are tipped to head higher in 2017/8. Photo / NZME

Banks have moved to upgrade their farmgate milk price forecasts for next season after the final GlobalDairyTrade auction for 2016/17 registered its fifth gain in a row this morning.

Fonterra's board meets next week to reassess the current season's $6.00/kg forecast and to decide on its opening forecast for next season.

ANZ has joined ASB in predicting a $6.75/kg farmgate milk price for next season and Westpac has lifted its forecast to $6.50/kg from $6.10/kg.

The GlobalDairyTrade index rose by 3.2 per cent at this morning's auction and the average winning price came to US$3313 a tonne, up from US$3233/tonne at the previous sale early this month.

The price of whole milk powder - the key product for determining Fonterra's farmgate milk price - rose by 1.3 per cent to US$3312/tonne.

ASB rural economist Nathan Penny said whole milk powder prices in the early US$3000s pointed to a market that was fairly well balanced.

"In terms of next season's milk price, this means we are comfortable to stick with our $6.75/kg forecast," he said.

A milk price of $6.75/kg for the season would represent a $1.35 billion injection for the economy from the entire dairy sector compared with the previous year, Penny estimated.

ANZ rural economist Con Williams said dairy prices continued to show strength, especially for milk fat, which pushed to all-time highs.

"Combined with a capped - in effect weaker - NZ dollar /US dollar rate, we have lifted our milk price forecast to $6.75/kg for 2017/18," Williams said.

There could also be 15c to 20c of upside to Fonterra's forecast for the current season, which ends on May 31, he said.

With breakeven for the sector in the low-$5s, farmers are moving back into the black and spare cash should start to emerge later this year.

Williams said a big focus would be debt repayment arising from the poor 2015/16 season, when the sector accumulated $1.50/kg of debt.

With the market more in balance, he expects whole milk powder to continue to trade in a US$2800 to US$3400/tonne range, with a midpoint around US$3100/tonne.

Westpac economist Sarah Drought said recent gains in prices have come against a backdrop of improving supply, especially from Europe and New Zealand.

"We expect milk production to continue trending higher over the remainder of this year, as farmers respond to higher farmgate prices on offer," Drought said.

Production in Europe had already risen notably off 2016's trough, and more product would become available to global markets as New Zealand's 2017/18 season ramped up from September.

"With New Zealand's 2016/17 season done and dusted, we stick with our milk price forecast of $6/kgMS - in line with Fonterra's latest update," she said.

"But for next season, we're upgrading our milk price forecast to $6.50/kg."

Westpac expects global prices to ease back this year but Drought said the foundations were there for a step-up in the farmgate milk price, thanks to the lower New Zealand dollar.