Fonterra lifts milk price forecast, mid-point now $9.60/kg

Fonterra has again raised its farm gate milk price forecast. Photo / File

Fonterra has lifted its 2021/22 forecast farmgate milk price range to $9.30 - $9.90 per kg of milksolids, up from its previous forecast of $8.90 - $9.50 per kg.

This increases the midpoint of the range, which farmers are paid off, by 40 cents to $9.60 per kg - easily the highest on record.

At that level, Fonterra estimates that the milk price alone will contribute $14 billion to the New Zealand economy.

Chief executive Miles Hurrell said the lift in the forecast reflected the increase in global dairy prices since the co-op's last milk price update in January, and good levels of ongoing global demand for dairy.

Hurrell said while the higher milk price puts pressure on the co-op's margins in consumer and food service, prices in its ingredients business remained favourable for the milk price and earnings.

"As a result, our current 2021/22 earnings guidance of 25-35 cents per share remains unchanged," he said.

Since Fonterra's last revision of the milk price in January, whole milk powder prices on the Global Dairy Trade platform have increased by 10.3 per cent while skim milk powder has increased by 8.4 per cent. Both products are key drivers of Fonterra's milk price.

"Global demand for dairy remains firm, while global milk supply growth continues to track below average levels. These demand and supply dynamics are supporting the increase in prices," Hurrell said.

"Milk production in the EU and US continues to be impacted by the high cost of feed and this is not expected to change in the coming months."

At home, ongoing challenging weather conditions have continued to impact grass growing conditions.

As a result, the Co-op revised its 2021/22 New Zealand milk collections forecast to 1480 million kgMS, down 3.8 per cent compared to last season.

"This reduction in supply reinforces our strategic focus on ensuring our milk is going into the highest value products," he said.

"The forecast midpoint of $9.60 per kgMS represents a cash injection of over $14 billion into New Zealand's economy through milk price payments alone, and will be welcome news for farmers who are facing rising costs on farm, including from inflation and rising interest rates," Hurrell said.

He said analysis by Statistics NZ showed a number of key farm inputs have experienced significant inflation pressure over the past two years, with electricity costs up 21 per cent and stock grazing rising by 36.9 per cent.

Looking ahead, Hurrell said there were a number of factors we are continuing to keep a close eye on, including the potential impact on demand from rising interest rates and inflation, increased potential for volatility as a result of high dairy prices, geopolitical issues and economic disruptions from Covid-19.