NZ milk processors lift forecasts

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Advances in whole milk powder prices at recent GlobalDairyTrade auctions is bolstering the outlook for New Zealand's largest export commodity and prompting milk processors to hike their forecast payout levels to farmers this season, signalling a boost ahead for the local economy.

Taupo-based milk processor Miraka hiked its base forecast late last week to a range of $5.80-to-$6 per kilogram of milk solids, joining Open Country Dairy which raised its forecast to $5.60-to-$5.90/kgMS, Westland Milk Products with a range of $5.50-to-$5.90/kgMS, and both Synlait Milk and Fonterra Cooperative Group at $6/kgMS. Dairy NZ currently estimates the average farmer will break even at a milk price of $5.05/kgMS.

Prices for whole milk powder have picked up in the second half of this year after a prolonged slump, as demand and supply move back into balance. The average price for whole milk powder on the GlobalDairyTrade platform has jumped by almost two-thirds since mid-July, and the futures market is forecasting a gain for a fourth straight auction this week.

"The turn in global markets has happened as we anticipated," said ASB Bank rural economist Nathan Penny. "Most of the major exporters now are producing less milk and hence prices have rebounded."

Dairy giant Fonterra began the current season with a forecast of $4.25/kgMS, and the latest uplift to $6/kgMS equates to an extra $3 billion of income for New Zealand's economy or an extra $3.8 billion compared with last season's payout of $3.90/kgMS, ASB's Penny said.

"Confidence has returned to the agricultural sector and that bodes well for the regions that rely on dairy" as well as providing "a decent chunk of income" coming back into the wider economy, he said.

Farmers will probably be "quite cautious" about the extra income, initially prioritising debt repayment, and then investing in maintenance, fertiliser, and stock, with land prices likely to pick up heading into the new year, he said.

"Given the size of the downturn it will be a gradual thing as opposed to a quick rebound," Penny said.

A pick up in the dairy sector will add to New Zealand's already "pretty healthy economy" which is being underpinned by housing, construction and tourism, he said.

"We see healthy growth for the next couple of years," Penny said. "We're not dancing on tables, but I think we are in a position where we've got something to look forward to and we do compare well -- New Zealand is standing out as one of the better economies floating around at the moment."