Fonterra payout boost signals rebound

Henry van der Heyden (second from left) on a trip to China, where sales of milk powder are tipped to treble. Photo / Supplied

The ailing economy is set to get a $120 million boost from Fonterra which yesterday confirmed the rebound in dairy prices by lifting its forecast shareholder payout.

The payout will be lifted 10c per kg of milksolids to $5.20/kg for the 2008/2009 season.

That is still 35 per cent less than the record $7.90 its 10,700 farmers received last season and down on initial forecast for this season of $7/per kg.

Fonterra is New Zealand's largest company and last year dairy accounted for 20 per cent of all New Zealand's export earnings.

The commodity market slump that followed the meltdown of financial markets last October sent Fonterra's dairy receipts into freefall.

The world price index for dairy products rose for 15 consecutive months to peak in November 2007. By February this year the price had plummeted 58.4 per cent.

Since then Fonterra milk powder auctions have shown a rebound of about 20 per cent on international markets.

In more good news Fonterra chairman Henry van der Heyden said earlier this month that sales of milk powder to China were likely to treble this year.

Yesterday van der Heyden described the increase as a welcome respite for farmers who still face a big drop in income and higher production costs.

"Normally, Fonterra only announces a revision when the forecast payout moves by at least 30c/kg from the previous forecast, but the board wanted to share the news of the higher payout forecast with farmers as soon as possible," he said.

Van der Heyden said he was wary of making any predictions about powder prices or payout given the volatility in global markets.

Given the severity of the global recession there was little chance of a major rebound in commodity prices, said Westpac economist Doug Steel. But the end of the freefall in milk powder prices was good news.

"We'd like to think that powder prices have seen the bottom," he said.

Given the price rises so far and the possibility of a further upside of around 3-4 per cent Westpac had factored in the possibility of Fonterra raising the payout by another 10c to $5.30/kg by the end of the season, he said.

But van der Heyden warned that farmers should expect some level of retentions from the payout if the final amount available for payout exceeded $5.20.

"We need to tread a fine line between maximising payout to our farmers and strengthening the co-operative's balance sheet in these uncertain and challenging financial times," he said.

"Retentions will be considered if the eventual payout is higher."

While the global recession was still limiting demand in many markets there were positive signs for New Zealand farmers on the supply side.

Global production was dropping as farmers in the United States and Europe culled dairy herds in response to lower prices and that would probably have a positive impact on pricing.

"We are in an economic recession but if there is an industry to be in it's food and I can't think of a better business to be in than dairy."

The payout boost was welcomed by Federated Farmers.

"The 10c revision may not sound like much, but for the June payment, it will represent some $120 million welcome dollars,"said Lachlan McKenzie, Federated Farmers Dairy chairman.

"This news comes at a time when many dairy farmers have dried off their animals ahead of winter, or due to a lack of feed resulting from a drier than expected autumn."

Fonterra has an annual turnover of about $17 billion, and reported revenues of $19.5 billion for the 14 months to July 31, 2008.

MILK MATTERS
* Global dairy prices fell 58 per cent between November 2007 and February this year.
* They have since rebounded 20 per cent but markets remain volatile.
* Last year dairy accounted for 27 per cent of New Zealand's total export returns.
* Westpac is picking there may be some scope for Fonterra to lift the payout again.

- NZPA