Bank revises milk price forecast downward amid sector challenges

There's little good news for farmers in a new report on the dairy sector.

The latest ANZ Dairy Report says the industry is facing a double-negative which is set to impact farmer incomes.

"Dairy commodity prices have moved in a downward trajectory since the beginning of the 2018/19 season, putting pressure on returns at the farmgate level," it reads.

The bank says a stubbornly strong New Zealand dollar is also negatively affecting returns. 

"While higher commodity prices and a lower exchange rate are forecast to materialise before the end of the season, it is now unlikely these movements will come soon enough to support our previous milk price forecast," the report says.

The bank has therefore revised its milk price forecast for the 2018/19 season to $6.10/kg milk solids (MS). It was previously $6.40.

 Average farm profitability before tax
Average farm profitability before tax Photo credit: Supplied

The revised forecast assumes an improvement in dairy commodity prices in the second half of the season. 

"Whole milk powder prices are forecast to average 6 percent higher than today's prices across the remainder of the season," the report says.

"In order to reach the lower end of Fonterra's current $6.25/kg MS forecast dairy, commodity prices would have to average 10 percent higher than current prices."

The bank said while the New Zealand dollar remains relatively strong against the US dollar, a slowdown in global economic growth, together with tightening global liquidity, is expected to put downward pressure on the New Zealand dollar in time. 

"Farm profitability for the current season has been revised down due to the fall in the forecast milk price and lower returns for cull dairy cows," the report says.

Farm expenses are also expected have an impact.

"Upwards pressure on farm working expenses has also been assumed, primarily due to the tight labour market and higher compliance costs."