Rise in farmgate milk price on cards

Fonterra’s dairy farmers may be in for another modest improvement in the farmgate milk price as the season nears its end.

The co-operative’s farmgate milk price is pitched at $6.00 per kg of milksolids and an increase to $6.20-$6.25 is seen as on the cards, despite mixed results from the last few GlobalDairyTrade auctions, economists said.

The high-producing period — which started in August — is now over and the futures market is pointing to a decline at this Wednesday’s GlobalDairyTrade auction.

Nevertheless, ASB Bank said there was a chance of a modest upgrade to the milk price at the next board meeting of the co-operative, due later this month, or in March.

ASB rural economist Nathan Penny said the bank’s expectation was based on the product that the cooperative had already sold, and its estimate of the product that was left to sell.

Penny last year revised up his forecast to $6.50/kg from its previous estimate of $6.00/kg. Now, Penny is rowing back on that a little, to around $6.20-$6.25/kg.

Despite the better price, farmers’ cash flows will still be constrained as Fonterra’s support package — which was rolled out in 2015 when the milk price collapsed to $3.85/kg — comes to an end.

The package, which made available interest free two-year loans — equating to 50c per kg of milksolids — ends later this year, after which time farmers will pay interest on sums outstanding.

Penny said the outlook was much more positive after the two-year-long price slump, but that farmers would be shoring up their balance sheets after the last two very poor years.

“There is a lot of balance sheet repair going on, and that’s not a quick process,” he said.

Fonterra’s South Island competitor, Synlait, has already revised up its forecast to $6.25/kg.

ANZ Bank rural economist Con Williams said the impact of a $6.00/kg milk price would take some time to filter through into the broader economy.

“In terms of additional stimulus, I don’t think that you we will see that until later this year, as long as the farmgate milk price remains stable,” he said.

Nigel Brunel, director financial markets at OM Financial, said this week’s GDT index could be down by about 5 per cent.

“I don’t think that the market is going to fall out of bed, but prices are under a bit of pressure,” Brunel said.