Fonterra's record day inspires hope

Photo / Mark Mitchell

Strong international commodity prices, the Rugby World Cup, tax cuts and the rebuilding of Canterbury signal good growth for 2011, says BNZ economist Doug Steel.

However, 2012 may not be so rosy.

Dairy exporter Fonterra set a new record peak day last week with 76.8 million litres of milk processed at the co-operative's 26 sites throughout the country - a jump of three million litres on last year's record.

Trade and operations managing director Gary Romano said it had been a slow start to the season with wet weather in the Waikato and Taranaki, and snow in the South Island.

"However, this recent spell of fine weather has seen a sharp increase in production on-farm."

Milk production was slightly ahead of last year but it was too early to talk about actual production figures for the year, he said.

BNZ economist Doug Steel forecast production to rise by 4-5 per cent at this stage.

Fonterra's forecast for the 2010/11 season is $7-$7.10 a kg of milksolids before retentions and a $7.10 payout based on stable production levels could be worth about $9.1 billion.

As things stood today with dairy prices, forecast payout and a likely increase in production, there would certainly be a strong boost to the economy in the next 12 months or so, Steel said.

Other commodities prices were hitting good levels in international markets, there had been a tax cut, the Rugby World Cup would be held here in 2011 and Canterbury would be rebuilt.

"I guess the caution is 2012 might not look so flash, especially if we get the lagged effect of the currency pulling down the [dairy] payout, the Rugby World Cup would have come and gone, the tax cuts - we get one of those, get the step up and then the growth impulse starts to wane."

Fonterra's new peak day showed that, outside of storms, the risk of a La Nina weather pattern at the end of the season and wobbles in international product prices, fundamentally there was an expanding dairy herd.

"We're likely to see more growth in milk supply over the coming years," Steel said.

"One day doesn't tell you all that but it does say that the peak this season is about 4 per cent higher than last year. It's an indication of that underlying trend growth that we think's going on."

The average price for a basket of products in Fonterra's latest online auction yesterday week showed no change, with an average winning price of US$3542 a tonne.

The outlook for supply and demand in the dairy sector seemed to be coming into balance, Steel said.

"Underneath that, in some sense don't be fooled by the relative calm," he said. "I think bubbling away under the surface there's some very strong forces at work in international dairy markets and at the moment they seem to be netting each other off."

Forces at play included reasonably strong demand from emerging markets and the Middle East, quite strong milk supply out of the US and water use restriction in Australia which was estimated to cut milk production by a billion litres.