Fonterra has raised its farmgate milk price forecast for this season, as milk supply weakens and demand improves.

The co-operative on Monday lifted its farmgate milk price forecast to between $6.50 and $8 per kilogram of milk solids. That increased the midpoint, which farmers are paid off, by 50 cents to $7.25 per kgMS.

The increase brings the forecast closer to DairyNZ’s estimated breakeven milk price of $7.78 per kgMS.

Fonterra chief executive Miles Hurrell says the improved outlook reflects both supply and demand dynamics.

“Here in New Zealand we’re forecasting collections to be slightly below last season, while aggregate milk growth in key export countries is expected to be below average for FY24. The El Niño weather pattern may have further impacts on supply, and this could be driving recent buyer sentiment.

“On the demand side, we have seen increases in recent Global Dairy Trade events. While this has been encouraging, it is not yet clear whether the stronger demand from China will be sustained. For other key regions, customers remain relatively cautious in terms of their forward purchases.”

Global dairy prices fell sharply at the start of this season amid lacklustre demand from China, Fonterra’s biggest market for whole milk powder.

But Chinese buyers returned to the market last month, pushing up whole milk powder prices almost 10% following an 18 per cent slump in August.

Fonterra’s milk collection so far this season is 2.2 per cent behind last season as farmers pull back production in response to weaker milk prices and elevated costs.

The season started in June and production typically ramps up quickly and peaks in late October.

Hurrell says it's “early days” for the co-operative’s contracted sales for this season and notes Fonterra still faces significant exposure to volatility in commodity prices.

Exchange rate volatility can also impact prices, although the co-operative’s hedging strategy lessened the impact and supported higher payments to farmers, he says.

The futures market is picking a milk price of $7.85 per kgMS for this season.

-Tina Morrison/Stuff.