Fonterra tipped to cut milk price forecast

Fonterra is today expected to trim its 2017-18 milk price forecast from $6.75 per kg of milk solids, which was set in September.

ASB senior rural economist Nathan Penny said dairy prices had weakened since the the last update. Both overall and whole milk powder prices had dipped more than 9% since September.

The ASB predicted the milk solid price would be cut to $6.50kg/MS.

''In particularly, we anticipate Fonterra is benefiting from its ability to switch production into higher-paying products such as butter and anhydrous milk fat.''

Other analysts expected a larger cut and the informal market consensus was sitting at $6.33kg/MS, he said.

The weaker New Zealand dollar had offset some of the dairy price fall. In the same period, the dollar had fallen by about 4c, or 5%, against the US currency. The full benefit of the dollar's fall was unlikely to be reflected in this season's milk price. Next season stood to feel the gain more fully.

The dairy market outlook had also weakened in the same period, Mr Penny said. Global production had improved and New Zealand weather and production had recovered after the wet spring.

''That said, dry weather is starting to pose a risk to New Zealand production.''

Dairy prices lifted slightly in the GlobalDairyTrade auction yesterday. Overall prices lifted 0.4%. Whole milk powder and skim milk powder were up 1.7% and 2.7% respectively.

Milkfat prices were weak and butter fell 11.1%.

The rise was more in line with futures pricing ahead of the auction than had been the recent experience.

Globally traded butter prices have fallen 25% since September - but supermarket shoppers should not expect to bank all of that benefit.

The price of butter fell to $US4575 ($NZ6648) a tonne at the auction.

''Butter was last at this price level in the early months of this year,'' AgriHQ dairy analyst Amy Castleton said in a note.

''Butter prices have now declined for five consecutive events, and have lost 25% of their value since September.''

Mr Penny said that there was typically a lag between price movements at dairy auctions and those in retail prices.

''The commodity price is just one component [of the retail price]. You've got wages, you've got transport, you've got marketing, you've got profit margins for retailers and all of the players in between. You'll see [retail price falls] with a lag and a smaller magnitude of price fall.''

Retail butter prices hit a record high in October, according to Statistics New Zealand's food price index. The average 500g block cost $5.67, compared with $3.50 at the same time in 2016.

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