NZX milk prices futures gain after Fonterra lifts 2018 forecast

"The past growth had primarily been driven by rising cow numbers and dairy land area," says MPI.

Milk price futures rose after Fonterra Cooperative Group lifted its forecast farmgate payout for the 2018 season although market analysts said it is too soon to predict any change in behaviour such as an increase in dairy farm conversions.

The 2017-18 (season) milk price futures on the NZX rose to $6.70 per kilogram of milk solids from $6.55/kgMS yesterday after Fonterra lifted its 2018 forecast payout to $6.75/kgMS from an earlier projection of $6.50/kgMS.

Nigel Brunel, director of financial markets at OMF, said given the volatility of global dairy prices it wasn't possible to assess the accuracy of the latest forecast but "on balance what we're looking at right now, the milk price is likely to stay above $6 this season."

Dairy NZ has estimated the breakeven point for the average dairy farmer is around $5/kgMS but Brunel says farmers are still restoring their balance sheets and getting debt paid. "We've had one season above $6 and now we're looking at a second season. Dairy conversions will not necessarily speed up."

The Ministry for Primary Industries forecast a 1 percent increase in milk production each year through until 2021 in its June Situation and Outlook for Primary Industries, a slower pace than the average 4 percent annual growth in the previous decade.

"The past growth had primarily been driven by rising cow numbers and dairy land area, in response to relatively strong milk solids prices," MPI's report said. "The lower growth forecast reflects a stabilising of dairy land use, in response to both price signals and also potential environmental constraints."

It said that in most regions, "over the next two to three years, the result of these policies will be a push to improve farm practice and restrict land use intensification. This will likely slow the growth of milk production."

Units in the Fonterra Shareholders Fund rose 0.5 percent to $6.03 on the NZX, and have gained 6.4 percent in the past year, tracking just ahead of the NZX 50 Index.

Fonterra also forecast earnings per share in a range of 45 to 55 cents, making the forecast total available payout to farmers in the 2017/2018 season $7.20 to $7.30, before retentions.

"We are seeing growing confidence on-farm across the country and, with global demand for dairy strengthening, the signs are for a good start to the season for our farmers and their rural communities although following a challenging period of very wet conditions for some of our farmers," said chairman John Wilson, in a statement to the NZX. The increase "reflects the ongoing rebalancing of supply and demand in global dairy markets."

Dairy product prices rose for the first time in three GlobalDairyTrade auctions last week, with the GDT price index gaining 0.2 percent to US$3,387. Whole milk powder, New Zealand's biggest commodity export, rose 3 percent to US$3,114 a tonne, having recovered from as low as $1,590/tonne in August 2015.