So long as prices hold up near current levels for the rest of the season then the $6 a kilogram of milksolids forecast by Fonterra should be achievable.
The lift in dairy markets has also caused Synlait and Westland to revise their milk prices up. Synlait’s milk price forecast now matches Fonterra’s, which is not too much of a surprise given it aims to provide its suppliers with a competitive milk price but any excess profit will be reserved for the shareholders.
Westland has also revised its milk price up and now forecasts a range of $5.50-$5.90/kg MS. Westland’s forecast will be based on what it can genuinely afford to pay its farmers.
The company recently admitted it is having some challenges executing its value-add strategy, which, so far, has delivered greater costs than returns. The company has high hopes it will soon start to see the benefits from some of its investments but judging by the milk price forecast its suppliers might have to wait another season before those benefits make any real difference.
Dairy farmers continue to make use of the NZX Dairy Derivatives market to manage their milk price risk. There are now more than 15 million kg MS of open positions most of it in the contract for this season.
Some farmers are starting to use the September 2018 contract to provide price certainty for next season. The current season futures contract is priced at $6.10/kg MS while the futures contract for next season is priced at $6.25/kg MS.
There is plenty of uncertainty surrounding next season. Global milk supply is expected to expand in 2017 as returns improve but the Dutch won’t be the ones pushing out more milk. To meet phosphate restrictions dairy cow numbers are expected to be cut by 11% next year.
