Fonterra has announced an opening forecast farmgate milk price of $4.25/kgMS for the 2016/2017 season, an increase of 35c on the forecast for the current season.
Chairman John Wilson said Fonterra’s forecast took into account a range of factors including the high NZD/USD exchange rate, supply volumes from other major dairying regions, current global inventory levels, and the economic outlook of major dairy importers.
"Conditions on farm are very challenging. The strength of the Co-operative’s balance sheet is enabling us to increase the advance rate in the first half of the new season.
"We will also bring forward payments for this season’s milk. This will provide some assistance with on-farm cashflows.
"We are doing this while remaining within our policies and maintaining our financial discipline."
The New Zealand dollar is relatively high and is currently impacting milk prices and our forecasts.
Wilson said that Fonterra is expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices, however Fonterra continues to urge caution with on-farm budgets.
"We will announce our forecast earnings per share for the 2017 financial year in July as normal. This, along with our forecast farmgate milk price, comprises the total available for payout to our farmers."
Chief Executive of Fonterra, Theo Spierings said the long-term fundamentals for global dairy remain positive with demand expected to increase by 2 to 3% a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.
In addition to global supply growth slowing, we are seeing imports into major dairy markets improving compared to a year ago.
"China dairy consumption growth remains positive and its demand for imports has been steady over recent GlobalDairyTrade events.
"We expect these drivers to result in the globally traded market rebalancing."
Spierings said that Fonterra will remain focused on securing the best possible returns for its farmers by converting their milk into high-value products for customers around the world.
There is no change to the current 2015/16 season forecast Farmgate Milk Price, which is being held at $3.90 per kgMS.
Fonterra farmers resigned to another tight season following milk price announcement
In response to the milk price announcement, the Dairy Chairman of farming group Federated Farmers, Andrew Hoggard, said that many farmers were hopeful of a price in the vicinity of $4.50.
"The reality is we have seen the opening forecast price change quickly as the market has changed.
"Unfortunately it has changed for the worse in the previous two seasons. Hopefully with this conservative forecast, we won’t see any further drops.
"Especially as there are some more positive signs out there in the markets presently."
It is welcome that Fonterra has brought forward the advance rate payments, however we are still dealing with a low milk price, that is undoubtedly still below the break even price for most dairy farmers.
Hoggard said that a recent DairyNZ economic survey showed that in the 14/15 season average farm working expenses were $4.07kg/MS, and the break-even price was $5.77.
"Figures are still to be crunched for 15/16 but we can assume the break-even price is now somewhere in the low to mid $5 range.
"This clearly shows that dairy farmers will again be financially pressed for the coming season," he said.