Buoyant international milk prices could pump an extra $400 million into the economy over the next year, according to Westpac. That’s the overseas income represented by a 40c rise in the milk price to farmers.
Westpac has upgraded its prediction of the forecast milk price for this season to $7.40 a kilogram of milksolids.
It expects Fonterra to do the same following its board meeting on Tuesday, or to go even higher.
Westpac said a combination of a weaker Kiwi dollar and persistently strong global prices had prompted the upgrade.
This year was shaping up as a bumper dairy season, economist Nathan Penny said.
»World prices remain very high, while growing conditions have been generally very good since the drought broke. The icing on the cake is a lower currency.»
The persistance of the high prices was a surprise.
»This time three months ago, we expected world prices would be around 7 per cent lower by the end of July.»
Tight world supply had contributed to the buoyant prices.
»However, we doubt that the market has gotten its head around prospects for growth in New Zealand production this season.
»We predict a rebound in production from drought of around 5 per cent on last year’s level. Fonterra has previously signalled production growth of 2 per cent – any lingering difference in production outlooks, following Fonterra’s update next week, may explain much of any difference in milk price forecasts.»
However, the increased production would be too much for world prices, which he predicted would fall more than 20 per cent by the end of this year from their July levels.
»Nevertheless, the combination of a weaker NZ dollar and strong recent global prices has prompted us to upgrade our milk price forecast.»
Previously it had predicted $6.50, while Fonterra’s forecast is $7.
Westpac also lifted its forecast for the 2014-15 year by 30c to $6.50 a kg, assuming the dollar would stay lower.