5 Apr 2013

Higher payout to dairy farmers predicted

10:27 am on 5 April 2013

An economist is expecting a higher Fonterra payout to farmers this season as global dairy prices soar.

Dairy prices in Fonterra's latest fortnightly auction overnight on Tuesday rose for the eighth consecutive time.

The average winning price jumped 14% to $US4,966 a metric tonne, on reduced volumes, and followed a 15% increase at the previous sale.

Last week, Fonterra lifted its forecast cash payout to farmers to $6.12, made up of a milk price of $5.80 per kilogram of milk solids and a 32 cent dividend.

Westpac has revised its own forecast upwards to $6.10 per kilogram of milk solids - 30 cents higher than Fonterra's estimate.

The bank's economist, Nathan Penny, says its forecast is conservative and could go higher.

He says prices have been pushed up by a reduction in milk supply due to the drought, combined with strong demand from Asia.

"Particularly as we are the main supplier of whole milk powder into China - we don't have a lot of competition in that market so when supply is constrained from us into China and given the strong demand in China - those two factors are combining and pushing prices skyward."

Supply from other countries is also limited, he says, with latest estimates from Australia for a 6% drop in production, US production is about 1% up and European production is also low.

He says prices will stay high this season though will come off a little once the Northern Hemisphere season starts.