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Fonterra's more bullish than expected opening forecast farmgate milk price for 2018-19 is tempered for now by Mycoplasma bovis concerns, economists say.
Yesterday, the co-operative announced an opening forecast of $7 while bumping up its 2017-18 forecast by 20c to $6.75.
The strong milk price reflected a global supply and demand picture that continued to be positive for farmers, chairman John Wilson said.
ASB senior rural economist Nathan Penny said the new season forecast was higher than ASB's own forecast of $6.50 and an informal market expectation of $6.60.
But that bullishness was tempered by Mycoplasma bovis concerns.
Farmers were unlikely to act on the strong milk price outlook and their spending and investment plans were likely to be subdued until these concerns receded, Mr Penny said.
Mr Wilson said global prices had risen since the start of the season and the price of whole milk powder was strong due to continued growth in demand from China and across Asia.
Fonterra's forecast milk collections in New Zealand had increased to 1500 million kg ms, up from the 1480 million kg ms reported at half year, thanks to improved farming conditions in March and April after a challenging spring and summer.
The higher milk price was good news for farmers recovering after two years of lower prices in 2015 and 2016, Mr Wilson said.
However, it also put pressure on Fonterra's earnings, which were already challenged due to the payment to Danone - last year Fonterra was ordered to pay the French food giant $183 million after a whey protein recall in 2013 - and the impairment of the co-operative's investment in Chinese company Beingmate.
As a result, it was revising its forecast normalised earnings per share guidance range down to 25c-30c per share and its forecast dividend range for the full year down to 15c-20c per share.
The revised earnings forecast was disappointing for shareholders and unitholders; however, the total forecast cash payout for farmers increased to $6.90-$6.95kg ms, which was the third-highest payout this decade, Mr Wilson said.
Fonterra's 2018-19 New Zealand milk collections were forecast to be 1525 million kg ms, a 1.5% increase on its current forecast for this season, and a lift in supply was expected from the EU, US, Australia and Argentina.
Westpac senior economist Anne Boniface said the bank was not as optimistic the recent pace of growth in demand from China would be sustained in the face of an expected noticeable slowing in the Chinese economy, and had a $6.40 milk price pencilled in for next season.
The upgrade to the current season milk price, in particular, would be welcome news to farmers facing a challenging time ''on many other fronts'', Ms Boniface said.
''There is more uncertainty about the outlook for the 2018-19 milk price this early in the season, and we would treat it with more caution.''
However, a third consecutive season where most dairy farmers were in positive cashflow territory should come as good news for New Zealand's agriculture sector, she said.
Mr Penny said ASB shared Fonterra's bullishness over the next three months. Weak New Zealand production and an acute global butter shortage were supporting New Zealand commodity prices while the recent weakening in the New Zealand dollar was giving the milk price forecast a boost.
However, it was more circumspect over the remainder of the new season.
A rebound in New Zealand production over the 2018-19 season was expected after three consecutive season falls.
