Dairy farmers still face losses this season despite a big lift in Fonterra's financial performance over the first half.
The co-operative's interim net profit shot up 123 per cent to $409 million, allowing the company to double its interim dividend to its highest ever point - 20c a share.
Fonterra's normalised earnings before interest and tax came to $665 million, up 77 per cent - in line with market expectations.
Paradoxically, low milk prices played a big part in the turnaround as they represent substantially lower input costs, strengthening margins.
Fonterra's value-added business - consumer and food service - reported a 108 per cent increase in normalised earnings before interest and tax (ebit) to $241 million.
The commodities side - ingredients - reported a 27 per cent lift in ebit to $617 million. Fonterra said it had shifted an additional 235 million litres of milk higher up into the value chain over the half year.
Chairman John Wilson said the supply and demand imbalance in the globally traded dairy market had brought prices down to unsustainable levels for farmers around the world, and particularly in New Zealand.
Fonterra is a bit like a supertanker - it does take a while to turn around.
Fonterra said its farmgate milk price of $3.90 per kg - against the average breakeven point of $5.25 - reflected global prices, with whole milk powder prices down around 17 per cent in the season to date. The company opted not to resurrect last year's soft loan scheme, but instead brought forward this year's final dividend payment - an expected 20c a share over two instalments - to help farmer cashflows.
Chief executive Theo Spierings said the co-operative's working capital had improved significantly, and inventory levels were lower than in recent periods for this time of year.
On the debt side, Fonterra's gearing ratio dropped to 49 per cent from 51 per cent in the previous year and the company expects the ratio to drop to a more conservative 40 to 45 per cent by the end of its financial year.
Wilson, in acknowledging difficult times for farmers, said Fonterra would be able to provide a partial offset for the very low milk price.
Three quarters of its farmers took up last year's soft loan, the first tranche of which was 30c. This, combined with the year's 40c total dividend, meant farmers would get 70c above the milk price.
The result built on a strong second-half performance over the 2014/15 year but compared with an abnormally weak first half in the previous comparable period.
"Fonterra is a bit like a supertanker - it does take a while to turn around," said ANZ agri-economist Con Williams.
We have confidence that the market will come back into equilibrium and that the price will reflect that over the next six to 12 months.
"They had a reasonable result in the second half last year and this has carried through to the first half of this financial year," Williams said. "It was not enough to offset low international powder prices, so it is still going to be challenging on the farm. But it is heading in the right direction."
High points were the big improvements in the company's two main revenue streams - ingredients and consumer and food service - while losses in the China farms and Australian operation were the low points, Williams said.
Some analysts have said farmers could be in for another two years of losses, but chairman John Wilson was optimistic that global prices would start to improve, as world dairy consumption growth was up by 2 to 3 per cent a year.
"We have confidence that the market will come back into equilibrium and that the price will reflect that over the next six to 12 months," he said.
The question facing Fonterra is whether the measures announced yesterday will be enough to stop farmers selling their Fonterra shares and jumping ship to other manufacturers, as was the case last year and early this year.
Wilson said there had been anecdotal evidence of loss of market share.
Farmers considering leaving Fonterra lodge their "cease" notices in February, but the co-op does not know until July as to whether they have followed through. Wilson said some farmers had moved out of dairy and gone to other land uses, and there had been fewer dairy conversions.