Sugar hit
OPINION: Winston Peters has described the decision to sell its brand to Lactalis and disperse the profit to its farmer shareholders as a 'short sighted sugar hit'.
While the strong milk price is lifting farmer confidence and sentiment, inflation remains a concern.
BNZ senior economist Doug Steel notes that even if a record milk price is achieved this season, it is unlikely to be a record in inflation-adjusted terms.
Fonterra is forecasting a mid-point of $9.50/kgMS and the upper end of its forecast range touches $10/kgMS. BNZ has lifted its forecast to $9.75/kgMS. The previous record farmgate milk price was $9.30 paid in 2021-22 season.
Steel notes that on-farm costs have increased significantly over recent seasons.
"On our calculations, a nominal milk price of about $11.50 would be required this season for a record to be achieved in real terms.
"That looks like a stretch too far, but it is not to deny a decent milk price this season is becoming more and more likely.
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"At the same time, more milk is also being made. Importantly, in the past, a high milk price has often been associated with weak NZ milk production. Not this year. NZ milk supply has generally had a strong start to the season."
Federated Farmers dairy chair Richard McIntyre says that while this might be a record milk price in dollar terms, that doesn't really tell the full story, because costs are up on farm as a result of inflation.
"To give you an example, to match the $9.30 paid in the 2021-22 season, we'd need the payout to be $11.50 in today's dollars," he told Rural News.
"Farmers will also be spending a lot of the money on deferred maintenance, paying down overdrafts to more manageable levels - which have been increasing the last few years."
Steel puts the strong milk price down to two broad reasons: constrained supply in major exporting regions, aside from Oceania; and buoyant demand, including the potential for some pre-buying ahead of Christmas, the Chinese Lunar New Year, and 'event risk' associated with the US election.
He notes that strong pricing and higher volumes will generate significant revenues for the dairy sector.
"Our current projections show dairy sector revenue associated with this season's milk to lift by over $3 billion compared to the previous season.
“There are likely some holes to fill from a tighter previous season. But more cash gives farmers options. It is good to have them.”
However, while positivity currently prevails, so do many risks.
“This includes how the second half of the NZ dairy season pans out and its potential influence on global prices.
“We are also wary of the possibility that at least some of the current dairy product price strength is associated with buyers lifting inventory levels ahead of potentially significant changes to US tariffs and possible flowon effects. If nothing else, such factors suggest some caution in blindly extrapolating current price strength into subsequent seasons.”
Fonterra chief executive Miles Hurrell says its forecast for the season signals another year of steady performance from the co-op.
“With Fonterra delivering consistent and reliable results, we’ve seen a lift in farmer confidence and sentiment,” says Hurrell.
