KEY POINTS:
Strong world dairy prices could give Fonterra farmers over $300 million more in payouts than is currently forecast this season, says Goldman Sachs JBWere.
But Fonterra says the strong kiwi dollar means it would be "reckless" to create expectations of such significantly increased distributions.
Average dairy product prices
are at an all-time high, fuelled by factors such as the Australian drought, production shortages in the US, lower than hoped for production growth in New Zealand and strong demand.
Rural data provider Agri-fax said yesterday that skim milk powder cost US$2075 ($4280) a tonne a year ago, compared to US$3100 ($4480) last week.
In a report released yesterday, Goldman Sachs said dairy prices were 16 per cent ahead of a year ago in New Zealand dollar terms.
The financial services company said if dairy prices stayed at current levels then this season's New Zealand dollar spot price would be 6.6 per cent better than last year.
"If full pass-through to payout is achieved, a dairy payout of $4.35/kg of milksolids appears feasible," said the report from economist Shamubeel Eaqub.
That figure is 30c/kg more than Fonterra's current forecast of $4.05/kg for this season.
Business Herald calculations - based on supplier numbers last season and average production of at least 100,000kg a supplier - indicate a gross payout at $4.35kg would be worth nearly $340 million more to farmers than at $4.05kg.
The report acknowledged that various factors affect payout and extrapolation of spot prices to payout rates was "overly simplistic".
But Fonterra "can do better than the initial guidance", Eaqub told the Business Herald yesterday.
He said the co-op had very strong increases in exports during the middle of last year.
"So they should have been able to realise some big increases in income that they should be able to distribute to farmers."
Agri-fax believed the predicted payout could end up being $4.15- $4.20/kg. But the co-op last month held its $4.05/kg forecast in the face of a strong dollar.
Fonterra Ingredients managing director John Shaskey said yesterday it was maintaining that prediction only because of higher prices. Otherwise the forecast would be lower.
"We're running fast to stand still at the moment," he said.
"Any messages going out to the farming community that would create expectations of $4.35/kg in my view would be reckless."
Federated Farmers president and dairy farmer Charlie Pedersen said he gave more credence to Fonterra's view.
He said farmers were under huge financial pressure and would be highly irritated if Fonterra were to come up with a significantly higher payout figure later.
"Most Fonterra shareholders will lose money [this season] at the $4.05/kg payout ... I think Fonterra is playing a completely open hand."
Fonterra has, however, already announced a scheme to help farmers capitalise on strong prices through a special "one-off autumn premium" aimed at encouraging additional late season production.
Meanwhile, Goldman Sachs said its global leading indicator suggested there would be a peak in commodity prices during the first quarter of this year.
However, the El Nino-related drought in Australia would help support New Zealand export prices for some time. General export prices in New Zealand dollar terms were expected to rise 5 per cent this year.
But the strength of the kiwi dollar and some "disappointing production" in New Zealand could blunt the positive impact.
"It's just a question of being cautious rather than being overly optimistic, thinking that because ... prices are really good farmers are going to be able to reap the full benefit of it."