$8 payout predicted for 21-22

Dairy prices are holding most of their gains from earlier in the year and remain remarkably high, a good omen for the coming season.

Westpac senior agri economist Nathan Penny is forecasting an $8/kgMS opening forecast and ASB has boosted its forecase by 20c to $7.50/kgMS.

Penny now expects dairy prices to start the 2021-22 season firmly on the front foot.

Penny points out that in milk price terms, the last GDT auction and NZ dollar rate equated to a milk price of over $9/kgMS. Since March, Westpac has lowered its NZD/USD forecasts by around two cents over the season, adding further upward impetus to milk price forecasts in NZ dollar terms.

"From the stronger starting point, we have built in a moderation of global dairy prices over the New Zealand dairy season.

"Specificallly, we forecast for whole milk powder prices (WMP) to fall by 18% over the season. In other words, we have built in a supply response to the higher milk price."

Another factor that could keep milk prices high is a very modest supply response to the high milk price by historical standards.

"As such we expect that dairy prices will remain stronger for longer," says Penny.

He notes that in New Zraland, dairy supply is constrained for a range of reasons, including environmental constraints, limits on cow numbers, limits on fertiliser usage and higher compliance costs.

"As a result, we expect modest production growth next season of 2%."

On the demand side, Penny expects robust demand to continue.