Fonterra's boost worth $283m

There is strong demand for New Zealand milk products in China. Photo / Thinkstock

Fonterra has given a pre-Christmas boost to its forecast payout to farmers that could pump nearly $300 million into the economy.

The farmer co-operative yesterday raised its forecast payout for the 2011/12 season by 20c to $6.90-$7.

Fonterra said the forecast reflected a modest recovery in global dairy commodity prices over the past two months and comprised a milk price of $6.50 per kg of milksolids and a distributable profit range of 40c-50c per share.

Prices in Fonterra's online dairy auction had edged up in three of the past four fortnightly auctions and the average price of a basket of products in the auction was now 5.8 per cent higher than in early October.

Chief executive Theo Spierings said world dairy trade growth was being led by milk powders, which reflected strong demand especially in emerging markets, including a number of Association of Southeast Asian Nations economies, as well as Brazil, Mexico and China.

The 20c increase in the forecast yesterday followed a 45c cut in October by Fonterra, which collected about 89 per cent of national milk production in 2009/10.

BNZ economist Doug Steel said the movements in the forecast reflected what was happening in international markets, whether it was dairy or foreign exchange rates.

"They are moving all over the place and really Fonterra's just reflecting what is out there," Steel said. "We take some comfort from that [forecast rise] ... suggesting that even though there are all these uncertain and volatile times in world markets, particularly around the European debt crisis, New Zealand is making what the emerging world wants.

"And the emerging world is where global growth is still centred. That's encouraging and to the point that even we're getting a little bit of increase in the price for our products."

Uncertainty and volatility were going to remain in the world market, including dairy, for the foreseeable future, Steel said.

"Looking through 2012 we're mildly optimistic of some rise but it's so conditional on the events or developments in Europe not pulling down growth in the emerging world more than it already has," he said.

Steel expected industry production for the season to be up about 5 per cent.

"If we can get a payout that's been forecast today that's a very good price for a lot of product which will translate into good revenues for the economy."

A 20c increase in Fonterra's forecast, based on a 5 per cent rise in production, would be worth $283 million, with the total payout worth up to about $9.9 billion.

"In the international dairy market, given the increases in supply we've seen, whether it be out of the States or Europe or New Zealand, to be seeing international prices stabilise or even push a fraction higher it speaks volumes to the fundamentals in that market," Steel said.

"It gives you some encouragement that maybe we are making the right stuff and selling it to the people that are growing the fastest."

Federated Farmers Dairy chairman Willy Leferink said the rise was a surprise, although he expected some increase at some stage.

"I think it's good for us because farmers in general distribute this wealth through the community and everybody will in due course have the benefit of this."

The forecast would be seen as a good payout and confidence was coming back into dairy farming, he said. "They haven't forgotten 2009 yet and I think farmers will still be cautious and reduce debt further if they have that ability."

Fonterra said the impact of foreign exchange volatility on the milk price became less as the season progressed and the proportion of foreign exchange hedging increased. Meanwhile, it said the estimated fair value share price for the 2012/13 season was $4.52 a share - the same as the current season.