NZ economy gets a shot in the arm (if all goes well) from Fonterra’s revised milk price forecast

Dairy giant Fonterra  has  lifted  the mid-point of its forecast farmgate milk price range to $6.80kg/MS, up from $6.40,while retaining its current +/-50c per kgMS range.

It’s  a  shot  in the  arm   not  just  for  the   co-op’s  farmer-suppliers  and the  country’s  rural  regions  but also for  the national  economy  as   it   strives  to  recover  from the impact  of the Covid-19 pandemic.

At  a  $6.80  milk price    more than $10bn  will flow   into regional  NZ.

Fonterra  has  found  stronger  demand from  China,  particularly  for  wholemilk powder   which  is a big  driver  of the  milk  price.    

This   will  be  encouraging for    other    milk processors    including  A2 Milk    whose  shareprice has been marked down  by investors  worried  about  demand  for  infant   formula  in  China.

Fonterra CEO Miles Hurrell,  announcing  the milk price  move,  says despite the initial impact of Covid-19,  demand for dairy products in China   has recovered.

“While it is still early in the season, dairy prices have improved from the levels we saw on GDT through the first wave of Covid-19 and demand for milk powders has proved resilient.

“We have seen this demand reflected in GDT auctions, with prices trending upwards in recent events and this is supporting our decision to lift the range and its mid-point, which farmers are paid off.”

 Hurrell says one of the co-op’s priorities is to have a competitive milk price, because this not only supports its farmers but it supports local communities as well.

Commenting on the supply-and-demand picture, Hurrell says the co-op is keeping an eye on a number of factors, which is why it is retaining a wide forecast range of $6.30 – $7.30 kg/MS.

It is still relatively early in the season and a lot can change. For example, we could experience volatility with exchange rates, milk supply from the EU and US is increasing and there continues to be uncertainty around how a potential risk from further waves of Covid-19 and a global economic slowdown could impact demand.

“With increasing demand and supply, we see the dairy outlook as more balanced, but given there are still a number of risks, we are still recommending our farmers be cautious with their decision making.”

As   Point of  Order  sees  it,     farmers who  have been  astute   enough to aim  for  higher  production    through the   latest  techniques  while   at the  same  time   moving towards  sustainability    will be  looking   forward  to  the  prospect  they  can   match or  even improve  on  last  season’s  bottom line,  when  the  final  milk price was  above  $7/kg/MS.

Meanwhile    the  strong outlook for the  dairying  is  stimulating  activity  in the  industry  more broadly.  NZ’s  biggest  land   investment  fund,    Southern  Pastures,   is  taking  over  the  50%  of  Lewis  Road  Creamery  that it  doesn’t  already   own  while  Lewis  Road  Creamery  founder  Peter Cullinane  stands  down.  Southern  Pastures,   which  operates  20  farms in the  Waikato   and  Canterbury  is seeking  to  expand  sales in  the  US.

And  work is set to begin on building Happy Valley Nutrition’s new $280m milk processing plant in Ōtorohanga early next year. General manager Greg Wood expects construction of buildings to get underway later in 2020 with first production planned for July 2022.

While the company’s intent remained to use primarily A2 or organic milk, it would be configured to enable it to take different milk types.

Most of the product would be exported to Asia. The company has investors from New Zealand, Australia, Hong Kong and Singapore.Initially it would look to process about 100m litres of milk.

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