KEY POINTS:
Despite lifting its payout to $9.6 billion yesterday Fonterra chief executive Andrew Ferrier has warned of increasing volatility in the dairy market.
Fonterra has boosted its forecast payout to $7.90 per kilogram of milksolids, having raised it to $7.30 last month - up by $4 billion from last
season.
The final payout for the the 2007/08 season will be announced in September, while the opening forecast for next season was already $7 - the highest initial forecast in Fonterra's history.
But Ferrier warned that, while in recent seasons there had been more chance of forecasts going up during the year, from next season there was an equal chance they could go down.
"There is an unprecedented level of volatility in all agricultural commodities, forecasting prices is more difficult, and there have been fundamental changes in equity markets, all of which we need to take into account in running the business," Ferrier said.
Fonterra chairman Henry van der Heyden said the forecasts still gave every reason to be confident about the outlook for the dairy industry.
"This is good news for our farmers to have the extra cash flow at a time when they are facing sharply rising input costs, which DairyNZ confirms are up by 32 per cent over the past year," van der Heyden said.
"It will also go some way to make up for the production lost this season due to the drought."
The continued strength of international dairy commodity prices, a weakening kiwi dollar and performance gains were key factors in the latest increase, van der Heyden said.
Fonterra Shareholders' Council chairman Blue Read said news of the payout increase was probably a little better than people were expecting and would help take farmers through the drought.
The impact of the drought in the summer has been estimated to be between $500 million and $1 billion.
Westpac economist Doug Steel said the payout was worth about $4 billion more than last year and was overwhelmingly good news for the economy. "It's a huge injection of cash and wealth and certainly going to prop things up a little bit in the face of other negatives like fuel prices and the housing market correction that's under way."
Farmers could choose to spend, save or leverage off the payout, he said.
"It seems so far that there's been a bit of all of the above really."
Lending to agriculture was up 17 per cent on last year, deposits were up 44 per cent and rural retail sales were up by about 7 per cent compared to 1 per cent in the cities, Steel said.
The latest increase in the payout was unlikely to greatly affect plans at the Reserve Bank in regard to interest rates.
"I'm sure they had a very strong dairy sector already factored in and really it's confirmation of where we thought world prices have got to," Steel said.
ASB chief economist Nick Tuffley estimated the total cash injection would be $9.6 billion this season - equivalent to about 6 per cent of gross domestic product.
The increase from last month's $7.30 forecast alone would be worth an extra $750 million. "The further increase in the payout does highlight [the] risk of the [Reserve Bank] waiting a little longer than September before cutting interest rates," Tuffley said. "The [Reserve Bank] won't have the time to factor the payout into its forecasts, but will be able to factor it into its OCR deliberations and written policy assessment."
Meanwhile, Fonterra yesterday set the fair value share price for 2008/09 at $5.57 - an 18 per cent drop from $6.79 this season. Van der Heyden said farmers were enjoying record returns as suppliers "but unstable global financial markets, high commodity prices squeezing ingredients margins, and a higher milk price have impacted negatively on farmers' investment in the co-operative".
The drop in share value was broadly comparable with the drop in share prices in New Zealand during the last year, Fonterra said.
Fonterra set the share price 11c below the mid point of the $5.26 to $6.11 range determined by independent valuer Duff and Phelps.
WHITE GOLD
* Fonterra has raised the payout to farmers to $7.90 per kg of milksolids.
* Payout is worth about $9.6 billion and $4 billion more than last year.
* Initial forecast for next season is $7.
