The lift pushed up the forecast’s midpoint range to $7.20/kg MS.
The lift coincided with the sixth consecutive price lift in the Global Dairy Trade (GDT) auction where milk prices were up 1.8%.
Fonterra chief executive Miles Hurrell says the revision was the result of strong demand for dairy since it last updated its forecast in December.
“In particular, we’ve seen strong demand from China and South-East Asia for whole milk powder (WMP) and skim milk powder (SMP), which are key drivers of the milk price,” Hurrell said.
“This lift in our forecast farm gate milk price is good news for New Zealand farmers. It would see the co-op contribute almost $11 billion to the NZ economy through milk price payments this year, which helps support the wellbeing of rural communities,” he said.
Chief financial officer Marc Rivers says that demand from Asia had continued throughout the season and it was extremely encouraging.
For China that demand in part was due to its ability to effectively manage the covid-19 pandemic.
“Maybe some of the effects of covid have been to change the mix of products, which is a core strength of Fonterra. We have the manufacturing network that allows us to adapt the portfolio based on those demand signals,” River said.
Those products are WMP, SMP and butter.
Rivers says the forecast lift reflected in the co-op’s confidence in the rest of the season.
“There’s still a lot more of the season to go and I think the things we need to keep our eyes on are the continued strong demand, which is very encouraging,” he said.
The flip side to the equation is supply, with Northern Hemisphere producers coming into spring and the United States in particular increasing its production.
“That could temper things a little bit,” he said.
Hurrell says the impact of any changes in global market dynamics had reduced and their view of the season had firmed up now that the peak of the 2021 milking season has passed.
“However, we are continuing to keep a close eye on a number of factors. These include NZ weather conditions, expected challenges from further waves of covid-19 and increasing milk production in the Northern Hemisphere,” Hurrell said.
Rivers says the co-operative’s expectations around production had remained unchanged.
“It’s more or less in line with last season, but we’re watching the weather closely,” he said, adding that the big question will be whether that demand will hold.
Westpac senior agri-economist Nathan Penny says the lift was no surprise after the bank lifted its own forecast to $7.50/kg MS in January.
“We expect Fonterra to revise further later down the track,” Penny said.
China was effectively covid-free and its economy had surged at the end of 2020 with demand flowing through all sectors of its economy.
For dairy, it is not just the staple items but premium items that were in demand. This was reflected in the strength of products such as butter and anhydrous milk fat (AMF) that were used in the food service industry.
“Those prices have come back with a vengeance,” Penny said.
“That indicates to us that Chinese households and South-East Asian households are confident enough to go out to eat at restaurants, they’re back at bakeries and their demand for cream and butter is back to normal.”
He expected prices to stay firm over the short-term before easing off in the new dairy season.
“Farmers are in a sweet spot. Milk price is looking firm, if not strong, they’ve had a good growing season compared to last season,” he said.
“There’s a chance things may dry out but given the amount of feed they have got on hand, I think they’ll be reasonably happy in general on how they are placed to see out the rest of the season.”
Fonterra will provide more detail on its overall performance and full year earnings guidance when it announces its 2021 half year results on March 17.
