Fonterra has announced this morning that its opening forecast farmgate milk price has been set at $7.00 per kg of milk solids for the 2013/14 season - up $1.20 on the current season - but that dairy commodity prices appear to have peaked.
Fonterra said it was holding its current forecast farmgate milk price for the current season, which finishes on Friday, at $5.80 per kg, and a forecast dividend of 32 cents per share, amounting to a cash payout of $6.12 for a fully shared-up farmer.
"We are maintaining our current season forecast but advising farmers to be cautious in managing their budgets as we have seen a sharp drop in milk volumes as a result of the drought, and recent declines in GlobalDairyTrade auction results," chairman John Wilson said in a statement.
Chief executive Theo Spierings said Fonterra was currently preparing its budgets for 2014.
He said shareholders and unit holders should expect the strong uplift in international dairy powder prices to create "a more challenging environment" for Fonterra's earnings in the first half of the 2014 financial year.
Economists said the increase in the milk price would provide a boost for the economy. The co-operative confirmed a higher advance rate schedule, with an opening rate of $5.00 per kg, reflecting the higher forecast for 2013/14.
The board will announce its forecast cash payout - which comprises the forecast farmgate milk price and dividend for the 2013/14 season - in July when Fonterra's budget is approved.
Wilson said the higher forecast milk price for the new season reflected continuing strong international prices for dairy.
"The general consensus is that dairy commodity prices have peaked but will continue at or near current levels until the fourth quarter of 2013," he said.
Wilson said a stronger forecast farmgate milk price, supported by improving cash flows and strong balance sheet, meant the cooperative was able to lift its advance rate for the new season to ensure farmers receive higher payments for their milk early in the season.
"A large proportion of our farmer shareholders have experienced drought conditions, which have had a significant impact on feed costs and production, resulting in early drying off of their herds," he said.
Chief executive Theo Spierings said the fundamental supply and demand balance had shifted because global milk production growth was slowing as a result of unfavourable weather conditions in many key milk production regions.
"Although we are seeing modest production growth in the United States recent cold conditions in Europe have had a negative impact on crops and dairy, and the outlook remains mixed," he said.
Milk production growth in 2013 for the top 15 exporting countries was projected at 0.5 per cent or 1.2 billion litres - well below the 1.8 per cent growth levels seen in 2012.
Westpac economists, in a market commentary, said the Fonterra announcement, combined with a forecast rebound in local production, meant 2013/14 was shaping up as a bumper season.
"Combined with the expected rebound in production, this is a sizeable boost to New Zealand Inc income," the bank said. The $1.20 lift represented around a $2 billion boost for the economy or around 1 per cent of nominal gross domestic product.