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Fonterra may raise its payout to farmers after upbeat dairy auctions

Fonterra Cooperative Group may increase its forecast payout to New Zealand dairy farmers for this season after prices for whole milk powder, the nation's key export product, lifted by more than a third over the past two GlobalDairyTrade auctions.

Agricultural economists closely follow the fortnightly auctions, where whole milk powder has spiked 35.6 percent over the last two sessions on lower volumes as production fell due to dry weather conditions. Auckland-based Fonterra is expected to update its current seasonal forecast for $4.70 per kilogram of milksolids following a board meeting early next week. It paid a record $8.40/kgMS last season.

In the latest auction overnight, dairy prices rose an average 10.1 percent, led by a 13.7 percent gain in whole milk powder and a 16.8 percent increase in cheddar. Following the auction, ASB Bank raised its 2014/15 forecast by 30 cents to $5/kgMS and its 2015/16 forecast by 50 cents to $6.50/kgMS. Westpac Banking Corp held its forecast for the current season at $5/kgMS and for next season at $6.40/kgMS while ANZ Bank New Zealand signalled there could be upside to its $4.70/kgMS forecast for the current season and that its $5.75/kgMS projection for next season may head towards the mid-$6/kgMS level depending on weather conditions.

"While this result has given upward momentum to dairy markets, New Zealand farmers still have to deal with drought (or dry conditions), slowing production growth and the accompanying lower farm revenues in the short term," ASB rural economist Nathan Penny said in a note. "However we think farmers are well-placed to manage through this difficult season, and the prospect of a firmer 2015/16 milk price will lift their confidence about the medium term."

According to Westpac senior economist Michael Gordon, Fonterra tends to announce any change to its forecast only if the movement is 30 cents or more, suggesting any upgrade in the next few weeks would be to at least $5/kgMS.

Meanwhile, the AgriHQ Snapshot Farmgate Milk Price indicates that if the GDT prices from the latest auction were achieved across the entire season this would equate to a milk price of $6.15/kgMS.