Fonterra farmers waiting on their second-highest payout in the season just ending have been told their average cheque for next season may soar to record heights - around $1 million each - as the earnings available for payout surges to $8/kg of milksolids, or more.
The cooperative's existing record amount available for payout was $7.90/kg in the 2008 season, from revenues of $19.5 billion for the 14 months ended July 31.
The new season's opening forecast payout for the 2011 season of $7.10 comprises a milk price of $6.60/kg milksolids -up 50c on the forecast for the present season - and a dividend of up to 50c for each share.
Chairman Sir Henry van der Heyden said the forecast represented an increase of 50c/kg on the forecast milk price for the 2010 season just ending, but directors will calculate an updated forecast in late July.
Fonterra's dividend policy is to retain 25-35 per cent of the "distributable profit" , but farmer-shareholders will on average receive a total payout up to $7.10/kg, according to cautious calculations allowing for high levels of volatility in the market .
"If international dairy prices and foreign exchange rates were to hold to current levels for most of the coming year, then it is possible that the 2011 payout could be well over $8," he said.
Kevin Wilson, rural economist at ANZ New Zealand, said the forecast beat market expectations, and while Fonterra will already have a portion of next season's profit covered, it was still 15 months away from the pay-out to farmers.
"It's a very good forecast - better than anyone might have expected," Wilson said. "The question is where the gains are coming from - consumption price or exchange rate? Both are important."
Mike Jones, strategist at Bank of New Zealand, said prices for New Zealand's raw materials are holding up well, and have helped push currency traders to the kiwi dollar from its Australian counterpart. The kiwi jumped to 81.50 Australian cents from 81.25 cents immediately before the Fonterra announcement.
"Sentiment for the kiwi economy is attracting attention with commodity prices being factored in on the Aussie cross-rate,"
Jones said. "I wouldn't be surprised if it rallies to 82 or 83 cents over the coming weeks."
Gains in the kiwi against the greenback were limited as safe-haven demand underpinned support for the US dollar. The kiwi was little changed at 67.01 US cents from 66.94 cents immediately before the announcement, after rising as high as 67.20 cents.
The 10,500 farmers are already expecting the cooperative's second-highest milk price of $6.10/kg and dividends of up to 50c/share - a payout after retentions of $6.40 for each share backed by milk production and a dividend of 20-30 cents for each additional "dry" share they hold.
Sir Henry warned that next season's outlook was an early snapshot: "That's what the market looks like right now, " he said. "The reality is that we are seeing big swings in foreign currencies and turmoil in some economies.
"These factors could have a big impact on demand for dairy products and the prices we ultimately realise."
Farmers doing their budgets for the coming season should base their planning around a payout broadly in line with this year.
"If prices hold up throughout next season, we could be looking at a significant improvement during the course of the year, but at this stage, in the current volatile environment, it would not be sensible to count on this".
Fonterra chief executive Andrew Ferrier said the opening forecast was based on continued strong growth in dairy consumption and demand from China, the rest of Asia, the Middle East and North Africa.
"Meanwhile, global supply remains constrained, with production down because of adverse weather in Europe and Australia, while tight credit conditions are constraining dairy growth in the United States," he said.
But Ferrier also warned of "considerable volatility" in the market and said unfavourable movements in foreign exchange rates or economic conditions in major markets could hurt global dairy demand and pricing.
The boost in dividends was an early indication that directors expected a rebound in operating profits in its ingredients business, and its trade and operations arm - the engine room of the business, which provides milk collection, manufacturing and the supply chain that link farms with customers.
Ferrier warned that in the current season, operating profits are under pressure because earnings from cheese and casein are lagging behind returns on whole milkpowder (WMP).
"If non-powder returns lag the returns on powders, there is a reduction in profit," he said. The ratio of these "stream returns" to WMP prices would improve next season, "unless there are significant further increases in powder prices".
- NZPA / BUSINESSWIRE