KEY POINTS:
Dairy giant Fonterra today announced a milk payout forecast of $5.53/kg milksolids for the 2007-2008 season.
The forecast was $1.18/kg higher than forecast for the current season, an increase of 27 percent.
Next season's forecast includes a basic milk price of $5.33/kg and a relatively low
value-added component of 20c/kg, and is based on an average exchange rate of US71c.
Fonterra chairman Henry van der Heyden said the record payout forecast was driven by "exceptionally high" commodity prices.
"The commodity prices are being driven by unprecedented market conditions where strong global demand for dairy products is continuing to outstrip a tight milk supply market," he said.
"We expect these market conditions to continue this year and this gives us confidence in putting forward our highest-ever forecast."
Mr van der Heyden said farmers would welcome the higher forecast and it would bring relief to farm budgets which had been constrained by tight cashflows.
In addition to commodity prices, the exchange rate had remained a big influence on the payout, and any significant movement in the United States dollar exchange rate for the New Zealand dollar were likely to affect the forecast.
Mr van der Heyden warned the downside of the high commodity prices was the negative impact on the value-add component of payout, which was forecast at 20c/kg -- heavily down from the current season's 51c/kg.
The value-add part of the payout comes from consumer products, food services and speciality ingredients profits.
But high commodity prices means that the Fonterra operations manufacturing fast-moving consumer goods and speciality ingredients have to pay a high price for raw materials.
Mr van der Heyden said the ingredients businesses faced a tough year ahead, particularly in more developed economies where sales prices were linked to internal domestic prices, rather than the world market.
Fonterra's payout for the 2005-2006 season was $4.10/kg of milksolids. At the time it blamed the drop of 49c on the previous season's final payout of $4.59, on a high average exchange rate of US66c.
This year the payout has also been boosted by soaring world dairy commodity prices, with Fonterra's forecast for the season most recently ended rising to $4.35/kg, a 20c lift from its predictions at the start of milking.
International prices for skim milkpowder have doubled during the current season and over the past two months prices have risen 33 per cent from US$3000 to over US$4000 a tonne.
The prices are being driven by growing demand, particularly from developing and oil-exporting countries, but supply is constrained, particularly out of drought-stricken Australia.
The step up in forecast payout for next season is likely to mean a boost of over $120,000 to the average Fonterra farmer.
Mr van der Heyden also announced the "fair value" of a Fonterra share had been set at $6.79, up 23c from $6.56 this season.
An independent valuer, Duff & Phelps has assessed a range for the share price at $6.46 to $7.51, with a mid point of $6.99, but the board chose to set the share value for next season 20c below the independent valuer's midpoint.
"The sharp rise in commodity prices during the past two months will reduce margins in the value-add businesses," Mr van der Heyden said.
This negative impact from the high commodity prices was not so apparent when the share value was assessed by the independent valuer, based on assumptions at March 31, he said.
- MZPA
