Surging milk production set to hit farmers in the pocket

Milk production is on track for a new record high this season, with a rural economist predicting the extra volume will mean a big drop in farmers' incomes.

A new ASB report says dairy production has started the 2018/19 season with a hiss and a roar - more than 5 percent ahead of the same point last season.

ASB Senior Rural Economist Nathan Penny said some of the reason for the healthy production numbers in annual change terms is that last season's production was so weak.

"In particular, farmers did it tough with an overly wet spring and then drought over summer in some parts," he said.

"This season so far the weather has been largely favourable, helping production start strongly," said Mr Penny.

He said farmers have also been in a better position to take advantage of the favourable weather. "Cashflows are positive and farmers are putting the dairy downturn behind them. Accordingly, farmers are spending more pasture maintenance (via fertiliser application) and on animal health. This spending has translated into more production per cow," he said.

With this in mind, the bank has doubled their 2018/19 production growth forecast from 2 percent to 4 percent. 

It says after three seasons of declining production, production is on track to set a new record high.

However Mr Penny said the strong production means a lower milk price forecast. 

"We have trimmed our milk price forecast by 25 cents to $6.25/kg," he said.

"In net income terms, the higher production is not enough to offset the lower milk price - and  we estimate farmer incomes are around $240m lower as a result of these forecast changes," said Mr Penny.