Fonterra unveils record payout

Fonterra is forecasting another record payout, but warns that prices could slip back again next year. Photo / The Listener

Fonterra has pushed its forecast payout to another record high - but global supply, commodity prices and currency value could see it slip back next season, says the dairy giant.

The farmer co-operative yesterday increased by 10c its forecast payout before retentions for the 2010/11 season to $8-$8.10 - combining a milk price of $7.50 a kilogram of milksolids and a distributable profit of 50c-60c a share.

Fonterra last week said it was on track for record production, more than 4 per cent ahead of the same time last year, with the season finishing at the end of this month. The final payout will be confirmed in September.

An $8.10 payout based on a 4 per cent rise in production could be worth about $10.8 billion - with each percentage point rise adding more than $100 million.

However, the opening forecast for the 2011/12 season was a lower $7.15-$7.25 before retentions, including a milk price of $6.75 a kilogram of milksolids and a distributable profit range of 40c-50c a share.

Chairman Sir Henry van der Heyden said the opening forecast for the coming season reflected a realistic outlook towards global dairy markets.

"In the current season, farmers have benefited from sharply higher commodity prices due to improved world demand for dairy products."

Although market prices and exchange rates would yield a milk price similar to the current season, commodity prices had started to drift down while the the New Zealand dollar remained high, van der Heyden said.

"As commodities are mostly sold in US dollars, a higher exchange rate hits the milk price."

Fonterra collected about 89 per cent of national milk production in 2009-10.

Chief executive Andrew Ferrier said he was pleased to see international prices stabilise, although current prices were well down on the highs of a few months ago.

"But I think this issue of volatility is still absolutely here to stay."

Operating earnings within the commodities and ingredients businesses and the consumer-brands businesses in total were expected to be marginally ahead of 2010 in spite of the strong global commodity prices.

A payout for the new season before retentions of $7.15-$7.25 would be a good return for farmers, Ferrier said. "It would still be the third-best payout, I think, in the history of the industry."

Shareholders' Council chairman Simon Couper said there could be no doubt dairying was the engine powering the economy.

"We have hit the trifecta for the country - record payout and production for this season and a record opening forecast for next season."

Federated Farmers Dairy chairman Lachlan McKenzie said farmers would be happy with the opening forecast for the new season.

"We're saying 'be aware of that volatility, be conservative'. Farmers that have to will be paying off debt, ensure that we focus on the fundamentals that are going to increase profitability, not just increase your costs."

BNZ chief economist Doug Steel said the new season payout would generate strong on-farm profitability and was positive for the economy.

Steel has forecast industry production to rise by 4-5 per cent in the coming season, reflecting some of the underlying growth from land being converted to dairying.

Strong demand from emerging markets, including China, was supporting international dairy markets, Steel said.

"China's market share of New Zealand dairy products has increased to around 20 per cent by value over the past year, from around 5 per cent only three years ago," he said.

"This is part of the wider Asian growth story, which New Zealand dairy and wider New Zealand agriculture is well placed to tap into."

A 4.5 per cent rise in production for Fonterra next year, on top of a 4 per cent rise this season with a $7.25 payout, could equate to a potential payout of about $10.1 billion.