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Fonterra lifts milk price forecast, citing 'strengthening demand'

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Fonterra flagged "strengthening demand" for dairy products as the sector's biggest exporter raised farmgate milk prices in its native New Zealand, putting them on track for a 10% rise year on year.

The co-operative lifted by NZ$0.25 per kilogramme of milk solids to a three-year high of NZ$6.75 per kilogramme of milk solids its forecast for prices paid to farmers in 2017-18, which started last month.

The increase "reflects the ongoing rebalancing of supply and demand in global dairy markets" said John Wilson, the Fonterra chairman.

"Global demand for dairy [is] strengthening."

Separately, Fonterra flagged "strong growth" in Latin American dairy imports, up 13% in the year to March, although noting "some easing" in expansion of volumes to Asian buyers.

Meanwhile, milk production is "flat to declining" in Australia, the European Union and New Zealand, three of the top exporters, although showing 2% growth in the US.

'Low levels of inventory'

Theo Spierings, the Fonterra chief executive, said that "increasing numbers of consumers in our global markets prefer dairy for their everyday source of nutrition, and that is converting into strong demand particularly in consumer and foodservice products".

He added that the group's outlook was based on "prudent" forecast, "given that we are still early in the season".

Fonterra was starting 2017-18 with "very low levels of inventory", Mr Spierings said, in an announcement which comes two weeks after the group revealed the withdrawal of 7,200 tonnes of Australian skim milk powder for sale through its GlobalDairyTrade auctions over the next year.

Price 'ceiling' broken

A recovery in dairy prices overall at GlobaDairyTrade has actually levelled off this year, with a continued surge in values of fat products - and notably butter, for which prices have hit record highs – offset by softness in markets for the likes of skim milk powder.

However, prices of whole milk powder have found renewed life over the past week, standing at $3,280 a tonne on Thursday in New Zealand's NZX market for September delivery, a multi-month high.

"Buyers have taken prices up through a sort of 'ceiling' at about $3,200 a tonne that has been in place since last April," said Tobin Gorey at Commonwealth Bank of Australia.

"The market seems to have been energised by that break and added further gains since."

Currency, butter factors

Mr Gorey attributed the gains in part to currency moves, and appreciation in the euro and the New Zealand dollar – currencies of the two major dairy exporters – against the dollar.

"Whole milk powder prices in both those currencies have gained a lot less than they have in US dollar terms," he said.

"But they have still gained so currency cannot be the complete explanation.

"The other part of the explanation is likely to be very high butter prices dragging the value of milk fat higher."

Australian price rise

Upward pressure on farmgate milk prices has also been evident in some other markets, including Australia, where top processor Murray Goulburn last month hiked an initial price outlook of Aus$4.70 per kilogramme of milk solids to Aus$5.20 after rivals put in higher forecasts.

Bega offered farmers Aus$5.50 per kilogramme of milk solids, with Fonterra offering Australian producers Aus$5.30 per kilogramme of milk solids.

By Mike Verdin

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