Fonterra's downward farmgate revision a 'surprise', says economist

A senior rural economist had labelled Fonterra's decision to cut back its 208/2018 milk price forecast 'a surprise.'

The dairy co-op has narrowed its 2018/19 forecast Farmgate Milk Price range from $6.30 - $6.60 per kgMS range by 20 cents to $6.30 - $6.40per kgMS.

It said it reflected the favourable foreign exchange movements but slightly weaker than expected pricing for whole milk powder and skim milk powder.

ASB senior rural economist, Nathan Penny said using the forecast range midpoints, Fonterra had effectively cut its 2018/19 milk price forecast range by 10 cents.

"The new $6.35/kg midpoint of the updated range ($6.30/kg to $6.40/kg) compares to the $6.45/kg midpoint of the previous range ($6.30/kg to $6.60/kg), " he said.

He said the downward revision came as a surprise as it contradicts the lift in dairy auction recorded over the past three months.

"Overall dairy auction prices, including whole milk powder prices, have lifted around 5 percent since Fonterra's last update back in February, while the NZD/USD has fallen by a similar amount," said Penny.

"Indeed, on that basis we had pencilled in a $6.60/kg milk price forecast."

He said Fonterra stating that prices had been "slightly weaker than expected", implies that the co-op's previous forecast had factored in larger price increases than achieved.

For 2019/20, Fonterra has set its opening season milk price forecast range at a relatively healthy $6.25/kg to $7.25/kg.

Penny said that was a relatively healthy level.

"Fonterra points to "strong [demand] across key trading partners" as supporting this healthy opening forecast."

Meanwhile Penny said he applauded Fonterra for introducing a wider range to its milk price forecasts.

"The new $1.00/kg range reflects the wide range of outcomes that are possible at this stage of the season."