Profits have soared at our largest exporter Fonterra, but the dairy giant says this performance is unlikely to be repeated in the second half of the year.
The cooperative said a robust performance from its NZ Milk Products division and strong sales in Asia and Latin American helped drive its net profit to $459 million in the first half to January, up 33 per cent on the previous corresponding period.
The cooperative also raised its current forecast cash payout for the 2012/13 season to $6.12 per kg of milk solids for a fully "shared-up" farmer, based on a higher forecast farmgate milk price of $5.80 per kg and a forecast dividend of 32 cents per share.
The previous payout forecast - issued in February - was $5.90 to $6.00 per kg. The previous forecast milk price was $5.50.
Westpac Bank said the revision to the milk price exceeded its own of $5.65/kg. "The increase in the farmgate milk price will mitigate the impact of the drought to some extent, although the regional variations in dairy farmer incomes will still be large," the bank said in a commentary.
Units in the Fonterra shareholders fund rallied by 25c to $7.30 after the result was released to the NZX.
The result showed Fonterra's gearing ratio improved to 40 per cent from 47 per cent in the prior period.
The cooperative raised its interim dividend to 16 cents from 12.
Fonterra said the performance of NZ Milk Products, and better sales in Asia and Latin America, were partly offset by "continuing challenges" affecting the performance of its Australian business.
Chairman John Wilson said the new payout forecast reflected a recovery in global dairy commodity prices over the past two months.
Prices have increased in seven of the last fortnightly auctions on the online trading platform GlobalDairyTrade (GDT). The GDT-Trade Weighted Index is now 26.7 per cent above where it stood in February.
World dairy trade growth is being led by powders - combined whole milk and skim - reflecting strong demand at a time when global supply is constrained, he said.
"We had excellent spring and early summer growing conditions across most of the country leading to strong growth in New Zealand dairy production and record volumes in the first half," Wilson said in a statement.
"The drought in the third quarter has been more severe and lasted longer than anyone might have predicted, and means we are currently forecasting total milk collection volumes for the full season to finish in line with last season," Wilson said.
Fonterra's strong balance sheet and cash flows meant it was able to increase the advance rate paid to farmers for their milk, Wilson said. The faster advance rate together with the higher forecast milk price means on average farmer shareholders will receive $100,000 earlier in the season.
Chief executive Theo Spierings said despite the drought taking effect in the North Island in January, it was a different story for those in the South Island.
Fonterra's milk collections for the season to the end of January were up six per cent on the same period last year, which in turn flowed into record production, and another new export volume record achieved in December.
The Australia-New Zealand business' earnings declined, with normalised earnings before interest and tax falling 32 per cent. "While our consumer business performance in New Zealand was slightly better than last year, Australia's consumer business had to contend with a very competitive retail environment," he said. He said Fonterra's strong first half earnings were unlikely to be repeated in the second.
"For the full year, we expect to see total milk volumes for the current season to be in line with last season," he said. He added that the ongoing volatility in commodity markets could have a negative impact on profitability.
"In many of our consumer markets, we are expecting intensified competition in the second half - particularly in Australia - and in Asia we are seeing signs of demand slowing," he said.