Butter underpins rise in commodities

Logs are helping lift New Zealand commodity prices. Photo / Stephen Jaquiery

New Zealand commodity prices rose across the board last week, supported by a 4% gain in dairy prices.

Taking a close look, the dairy index was underpinned by a ''whopping'' 11.6% surge in butter prices, the largest weekly price increase since September 2016, ASB senior rural economist Nathan Penny said.

The other main components followed suit, all posting gains last week.

The sheep-beef index climbed 1.3% and the forestry index lifted a more modest 0.9% on the back of higher log prices.

Fonterra last week announced a bullish first cut at next season's milk price of $6.55kg/ms, he said.

''In contrast, we had thought Fonterra may set its opening forecast closer to $6 kg/ms. At the same time in previous seasons, Fonterra has tended to err on the cautious side in its opening forecasts.''

Beyond the opening forecast, ASB expected the milk price to end the season at $6.75, he said.

Although the headline milk price forecast was on the bullish side, Fonterra balanced that by setting monthly advance payments at a more conservative level, Mr Penny said.

Specifically, initial advances were set at $3.70kg/ms, excluding capacity adjustments, or 57% of the forecast, compared to 59% at the same stage last season.

Meanwhile, the current season forecast had been lifted by 15C to $6.15kg/ms, in line with expectations. Fonterra had retained its earnings guidance of 45c to 55c per share and its cash dividend target of 40c.

''At the margin, this is likely to add to activity more generally in the sector. The announcement also gives farmers a firm production signal for the season ahead.''

With that in mind, the recovery in production might be soon and stronger than previously anticipated, weather permitting, he said.

Stronger production might cap any upside to the ASB season-end milk price forecast of $6.75.