Dairy farmers will be very keen to see the first Fonterra forecast of the farm gate milk price for the 2023 season, due to be published on Thursday, May 26.
It will include a wide margin of perhaps plus or minus 75c around a mid-point that dairy analysts believe will probably start with $9 but may be in the high 8s.
Fonterra’s milk price panel is required by the legislation to make its best estimate based on current market factors, not to start low and gradually improve as the season goes by.
Setting of the first forecast will occur in one of the best ever combinations of world dairy commodity prices, milk supply, product demand and the NZ dollar value at the start of a season.
Fonterra’s treasury team will be hedging as many future currency transactions as possible at US62-63c, after the co-operative has chased forward sales of reference and non-reference products.
That US4-5c reduction of NZD value compared with this season is worth up to 50c/kg milksolids on the farm gate milk price.
Dairy analysts all run similar computer programmes for milk price forecasts but over a time frame of 16 months the possible variables are numerous and they plug in different elements, like NZD predictions.
Westpac senior agri economist Nathan Penny says Fonterra’s practice of beginning with a $1.50 spread and narrowing as the season unfolds is entirely sensible.
“Farmers need a milk price forecast, but the spread also shows how much uncertainty is part of forecasting so far in front.”
In May last year Fonterra began with a mid-point of $8 and a spread between $7.25 to $8.75.
This year Penny expects nearly $1 more and has placed his chips on a mid-point of $8.90 with a range from $8.15 to $9.65.
“The new normal is $8 and this commodity price cycle is going to stay higher for longer,” Penny told a recent dairy field day.
ANZ agricultural economist Susan Kilsby recently reduced her bank’s 2023 forecast by 80c to $8.50/kg, which she thought would be a good chance of being Fonterra’s starting mid-point.
“We expect dairy commodity prices will continue to fall in the coming months, but relatively low global milk supplies are expected to put a floor under prices later in the year.
“At this stage we anticipate dairy commodity prices will continue to fall for the next three to six months before stabilising.
“There is considerable uncertainty about how supply constraints and waning demand will balance out in terms of price movements.
“NZ milk price futures are currently trading at considerably higher prices than our updated forecasts.
At present, farm gate milk prices are benefitting from the fall in the value of the NZ dollar.
But the recent easing in the NZD will have more impact on next season’s milk price rather than the current season, which has only a few days to run.
Kilsby says the ANZ currency team had assumed a modest US1c drop in the NZD/USD crossrate for the whole 2023 dairy season compared with the 2022.
While the current exchange rate was lower, they anticipated it would rise towards the end of the year.
“But forecasting the dollar is harder than forecasting the milk price,” she says.
ASB economist Nat Keall says the favourable exchange rate is helping offset some of the recent trimming in dairy prices.
With the spot rate consistently below the assumption at the start of the season, the ASB forecast for Fonterra’s effective hedged NZD/USD rate has also come down a bit, which is positive for the farm gate price.
Westpac’s current 2023 forecast is $9.25 and the ASB is on $9.20.
