Westpac raises NZ milk price forecast to $7.50/kg as China's dairy demand soars

Fonterrra may lift its farmgate milk forecast to $7.50 kg, Westpac says. Photo / NZ Herald

Westpac has lifted its 2020/21 farmgate milk price forecast by 50 cents to $7.50/kg - 20c above the upper end of Fonterra's forecast range.

If it comes to pass, a $7.50/kg milk price would be one of the highest in the co-op's 20-year history.

In addition, Westpac has increased its 2021/22 milk price forecast by 25 cents to $7.25/kg.

Most economists have forecast a $7.00/kg milk price for the current season but have said a stronger New Zealand dollar could weigh on the season ahead milk price.

Fonterra's current range for 2020/21 is $6.70/kg to $7.30/kg.

"The forecast lifts are on the back of surging global dairy prices, particularly at the start of this year," Westpac agri economist Nathan Penny said in a research note.

Since early November, overall dairy prices have jumped 17.2 per cent, with more than half of the lift occurring since the start of the year.

Fonterra's farmgate milk price has exceeded $7.00/kg only four times in the co-op's 20-year history.

In the 2007/8 season, it hit $7.59/kg, $7.60/kg in 2010/11 and $7.14/kg in 2019/20.

The peak was $8.40/kg in 2013/14.

Westpac's upgrade follows this week's Global Dairy Trade auction, which saw prices overall improve by 4.8 per cent.

Milk fat prices have been on a tear in the past few months.

Anhydrous milk fat (AMF) and butter prices - which both have a bearing on Fonterra's milk price - have surged.

Over the past four months, AMF and butter prices have jumped by 38 per cent and 44 per cent, respectively.

"This is a key development as it demonstrates that demand for products consumed in restaurants and other food service settings has returned," Penny said.

Chinese demand is underpinning the price surge, Penny said.

"China largely has Covid under control and its economy has rebounded strongly."

Penny pointed out that the Chinese economy actually grew over 2020, the only major economy to do so.

The global dairy price lift is mirroring a broader lift in other commodity prices.

Brent oil prices, for example, are trading above US$55 a barrel, essentially back at their pre-Covid levels.