Fonterra may lift its farmgate milk price payout to farmers this season following increases in Global Dairy Trade auction prices, according to brokerage OMF.
New Zealand's dominant milk processor has said it expects to pay its farmer suppliers $6.40 per kilogram of milk solids for the 2017/18 season.
However OMF said in its monthly New Zealand Dairy Report published Tuesday that strengthening dairy prices have pushed up the expected payout in its modelling to $6.78/kgMS.
"Based on season-to-date GDT prices and assuming that prices remain unchanged through to May, our milk price model points to a payout of $6.78/kgMS," OMF said in the report.
"Fonterra has around 22 per cent of product left to sell over this period, and we estimate that Fonterra's current guidance would be consistent with prices falling 18 per cent on average (which would be highly unlikely). We look for Fonterra to announce a conservative 25 cent increase in the milk price."
OMF said hiking its milk payout to farmers would allow the farmer-owned cooperative to recognise losses and impairments relating to its investment in Chinese infant formula producer Beingmate Baby Child Food, without harming farmer incomes.
"We believe Fonterra is likely to partially write-down its 18.8 per cent stake in Beingmate, reflecting the downward revision in its earnings forecast to CNY800-1000 million (NZ$174-217 million) and the latest downturn in its share price," OMF said.
"In particular, Beingmate's poor performance has a direct impact on Fonterra's profitability - Fonterra's share of Beingmate's net loss was reported at NZ$42m in FY2017 - and we expect losses this year to weigh on Fonterra's earnings and dividend payments."
OMF noted recent rainfall had improved pasture growth and suggested the country's milk production may not be hurt by dry conditions as much as Fonterra expected. It expects prices to be flat in the overnight auction after three successive gains.
In late December, Fonterra said it expects its New Zealand milk collection to fall 3 per cent to 1480 million kgMS this season from 1525 million kgMS last season as dry weather stunted grass growth.