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Welcome surprise

Key highlights

Fonterra lifts its 2016/17 milk price forecast by 50 cents to $5.25/kg.
As dairy auction prices consolidated their recovery.
We expect prices to remain firm over the remainder of this season, leading to a final milk price of $6.00/kg.

Report prepared by:

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


Fonterra caught us by surprise this morning, lifting its milk price forecast by 50 cents to $5.25/kg. However, it was the timing, not the lift itself, that caught us by surprise.

In a way, the new milk price forecast will steal some of the thunder from tomorrow’s Fonterra annual results announcement. Indeed, we expect a much-improved Fonterra result for the 2015/16 year and indications of further improvement over 2016/17.

Secondly, the milk price forecast upgrade signals that Fonterra is increasingly confident that recent auction price lifts will stick. In that sense, Fonterra is coming around to our view sooner than we had anticipated.

Specifically our view is that dairy markets have fundamentally shifted. In particular, farmers have changed behavior in response to low milk prices by lowering production levels. Moreover, we expect there is further production weakness to come over 2016. In this respect, this season is different and we expect that August and September’s price recovery is sustainable.

With that in mind and likely further global production weakness, we expect prices to stabilise around current levels, before lifting again later in the season. As a result, we continue to expect a finalised milk price of $6.00/kg for 2016/17.

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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