New Zealand milk producers are looking at significantly better milk prices this season, as dairy commodity markets continue to strengthen.
Leading co-op Fonterra has this week forecast a milk price for its members of $5.70/kg of milk solids, up 21% on last season’s value. To this will be added a share of distributable profit, taking the total forecast return to $6.05/kgMS.
The new figure compares with an opening forecast for 2009/10 of $4.55/kgMS in July and a revised figure of $5.10/kgMS in September.
Fonterra chairman Sir Henry van der Heyden said that, although the recovery in consumer demand remained “fragile”, the higher forecast reflected the co-op’s increasing confidence around the recent gains in international dairy prices.
“The improvement in global dairy markets reinforces that dairying is a business that’s in good heart with sound long-term prospects, though a big gain like this in the payout forecast, just shows how much volatility there is,” he said.
“It’s heading in the right direction and we’re making the most of the opportunities for our farmers. But, we also know there’s a risk of rapidly rising prices potentially bringing on more milk from other countries. We saw this happen in 2007 and we saw how quickly the market can fall as a result.”
Fonterra chief executive Andrew Ferrier (pictured) pointed to the fact that, over the past four months, the average price of whole milk powder sold on the co-op’s auction platform had risen by a total of 88%.
There was a tight supply situation globally for many dairy commodities and this was reflected in latest pricing.
But he warned that prices for non-powder products such as cheese and casein had not risen at the same rate. “If Fonterra cannot achieve an equivalent return for these products compared to milk powders, the difference comes off profit,” he warned.
And while Fonterra’s overseas businesses were also performing well, the high NZ$/US$ exchange rate would impact negatively when the profits were converted back into New Zealand dollars.
“The high dollar is certainly hurting earnings, and the level of volatility is making forecasting a challenge,” said Mr Ferrier.
For more on the rising dairy market, see Phil Clarke’s Business Blog