Powder capacities limit milk returns

Whether Fonterra decides to maintain its forecast farm-gate milk price at $8.30/kg of milk solids - or lift it - will be revealed when it gives an update next month.

The co-operative is required to consider its farm-gate milk price every quarter as a condition of the Dairy Industry Restructuring Act.

In December, Fonterra unexpectedly left its forecast milk price unchanged at $8.30 and slashed its dividend by 22c, due to what it described as an extraordinary situation.

The surprise announcement meant a forecast payout of $8.40/kg of milk solids for the 2013-14 season, which was much lower than the predictions of some economists who thought it could tip the $9 mark, although still a record.

Fonterra attributed its decision to the disparity between very high milk powder prices, and those for cheese and casein.

In its latest global dairy update, Fonterra said its decision to leave the forecast unchanged had a positive effect on New Zealand Milk Products' ebit in the second quarter.

The decision reflected the reality that it was not possible to lift powder production above current levels because of the nature of Fonterra's existing production facilities in New Zealand.

That meant a proportion of milk had to be converted to non-reference commodity products, predominantly cheese and casein, which were generating significantly lower returns at the time.

It was a relatively unique situation and Fonterra would continue to monitor it ''very closely'', the update said.

Milk collection across New Zealand for the eight months to January 31 reached 1120 million kg of milk solids, 4.2% higher than at the corresponding period last year.

Rain through December and early January helped maintain milk production about last season's level with the North Island 3.7% higher and the South Island 5% higher for the season to date.

The United States Department of Agriculture has revised upward its 2014 milk production estimate based on the expectations of a large US dairy herd, and increased production, later in the year.

A question about increased production lay in California - home to 20% of US milk production - which was experiencing its worst drought in a long time, Prof William Bailey, from Western Illinois University, said in the latest ASB Commodities Weekly.

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