Fonterra expected to cut farmgate milk price tomorrow

An economist expects Fonterra to trim its forecast to $6.50/kgMS tomorrow.

Fonterra Cooperative Group is expected to cut its forecast farmgate milk price for the current season as early as tomorrow in line with weaker global dairy prices.

While the GlobalDairyTrade price index edged up 0.4 percent at last night's auction, snapping four consecutive declines, that wasn't enough to sway analysts from their belief that Fonterra will need to lower its forecast for the upcoming season when it reviews the milk price this month as part of its obligations under the Dairy Industry Restructuring Act. Estimates for Fonterra's payout range between $6.19/kgMS-$6.50/kgMS, all below Fonterra's $6.75/kgMS forecast set in September, according to a BusinessDesk poll today of six agricultural economists and dairy market analysts.

"Dairy prices have weakened since the last update," ASB Bank senior rural economist Nathan Penny said in a note. "Both overall and whole milk powder prices have dipped by a little over 9 percent since then."

Penny said he expects Fonterra to trim its forecast to $6.50/kgMS tomorrow. Fonterra paid its farmer suppliers $6.15/kgMS for the 2016/17 season, and $3.90/kgMS for the 2015/16 season.

New Zealand exports about 95 percent of its milk production, and Fonterra is the country's dominant milk processor and world's largest dairy exporter. Dairy production in New Zealand has lifted following a period of wet spring weather although the looming risk of a drought over summer could dent production in the months ahead. Meanwhile, a decline in the New Zealand dollar since Fonterra's last update of its milk price, which is supportive of exporters, may not flow through fully until the following season, Penny said.

He expects global prices to consolidate further over coming auctions.

"Short-term price risks are largely evenly balanced, with dry NZ weather on one hand and improving global production on the other," he said.