“While the increase in milk price can put pressure on our input costs, we remain comfortable with our current 2021-2022 earnings guidance range of 25-40 cents per share.”

He says it’s still early in the season, a lot can change, and there can be increased volatility when prices are high.

Fonterra’s central portfolio management director Bruce Turner says the fundamentals of dairy are strong because of growths in population and the middle class around the world.

Speaking at a NZX Virtual Global Dairy Seminar, he said globally, demand for dairy is exceeding supply and in NZ, production is currently 1% behind from where it was at this point in the season last year.

“August and September were both soggy, wet months and not good for dairy farming. August was 4.2% down and September 4% down for New Zealand,” Turner said.

That trend continued into October.

The whole milk powder (WMP) outlook was strong. Declining stocks through late 2020 lifted prices and while it has come off its highs, he says global demand was continuing to support this product and was outstripping supply.

“Continued strong demand for WMP supply is constrained because of the adverse impact on milk production in Oceania in particular and there’s continued strong prices as a result of that,” he said.

Skim milk powder (SMP) and butter were also holding well. SMP inventories were extremely tight and strong demand was leading to upward pricing pressure. Butter’s reliance on the foodservice sector saw prices take a hit due to covid-19. While prices are volatile, it was showing signs of recovery.

For farmers, that all translated into the decision to lift the milk price.

Farmers should still make a healthy profit this season despite accelerating on-farm costs including inflation and interest rates, economists say.

AgFirst economist Phil Journeaux says the payout will provide an extra $38,000 for the farming model the consultancy uses in its annual economic survey for Waikato and Bay of Plenty farmers.

What concerned him was whether farmers could absorb rising on-farm costs when the payout eventually falls.

The average increase of farm working expenses for that model was about 4% a year over the past five years.

He estimated those expenses had increased 6-10% this year. A 10% increase in costs pushed the breakeven point for that model from just under $7-$7.34/kg MS.

“When the payout drops – which it will – there’s no way you can carry $7.34 breakeven,” Journeaux said.

DairyNZ economist Graeme Doole says if the final milk price is significantly lower than what it has been signalled as, it could have a big impact.

“But moving forward, the cost structure is going to get higher,” Doole said.

This was a trend occurring among most of the developed dairy nations and the higher milk price itself was also driving those expenses, he said.

The average NZ dairy farm had operating expenses sitting at around $6624/ha and interest costs sitting at $1400/ha for this season.

On the income side, the extra 40c in milk price meant an extra $920 a hectare in revenue for the average farmer compared to last year, but he says about $615 of that would be expenditure.

Despite the creeping cost issues, Doole believed the milk price will stay solid for the rest of the season.

“We’re talking about a very good year,” he said.