26 May 2016

Fonterra's forecast price expected to be below farmers' costs

8:46 am on 26 May 2016

Fonterra's forecast farmgate milk price for the upcoming season is expected to be well below the break-even point for farmers.

The market is expecting the dairy co-operative to issue a forecast price this week of between $4.50 and $4.80 per kilo of milk solids, compared with the current season payout of $3.90.

Organic Jersey cow on a Rongotea farm.

Dairy farmers have been taking on debt and cutting costs to survive low milk prices. Photo: RNZ / Alexander Robertson

Dairy analyst at AgriHQ Susan Kilsby said though milk prices were trending up it was going to be another tough year for dairy farmers, who needed about $5.20 to cover costs.

After three season of below break-even milk prices farmers were taking on more debt and selling off assets outside the farm.

As well, they were altering farming systems to reduce costs.

"But they can't stay down at this level forever, or we'll get to a situation where there won't be a lot of milk supplied at all."

Ms Kilsby said prices could potentially dip lower over the coming months, but she expected a gradual strengthening over the long-term.

While low prices are challenging for farmers, they have benefits for Fonterra, said Mark Lister, head of wealth research at Craigs Investment Partners.

"If you think about Fonterra, milk is a cost of production for them.

"They have to buy the milk from their farmer suppliers so a lower milk price isn't all bad."

Looking at its earnings, things were upbeat for Fonterra, which was was performing well as a company, he said.