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Lining up the dairy ducks

Key highlights

We expect Fonterra to open the 2016/17 season next week with a milk price forecast in the vicinity of $4.80/kg.
By season end, however, we expect the milk price to lift to $6.00/kg.
With the lift over the season particularly contingent on slowing NZ and EU dairy supply growth over 2016.

Report prepared by:

Nathan Penny, ASB Rural Economist
Phone: +64 9 448 8778
Email: nathan.penny@asb.co.nz

2015/16 has ended on a positive note, but the dairy season as a whole price wise has been tough. For example, weighted-average prices for this season have been upwards of a third lower than from their historical averages.

In the new season, we expect milk prices to turn the corner, but this view is contingent on several ducks lining up. In particular, our view is contingent on global dairy supply growth slowing further this year as low milk prices weigh on farm cashflows. NZ and Australian supply is already on the way down and this needs to continue into the spring, while the market also needs more evidence that EU supply growth is slowing.

At this juncture, the market expects a more modest price recovery than we do. Similarly, we expect Fonterra set its opening milk price forecast for 2016/17 in the vicinity of $4.80/kg.

If we are right, and the discussed dairy supply ducks line up, the milk price will lift over the course of the season, ultimately ending at $6.00/kg. However, either way and given low initial advances to farmers, farm cashflows will remain very tight well into 2017.

Read the full PDF Report

Important Disclaimer - The views expressed herein are those of the authors and are based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are not necessarily the views of ASB Bank Limited and are given with an express disclaimer of responsibility and no right of action shall arise against any of the authors, ASB Bank Limited or its employees either directly or indirectly out of any views, advice or information.
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