Fonterra payout could give economy $2b boost

Photo / Mark Mitchell

The economy will get a $2 billion boost if Fonterra's forecast farmgate milk price of $7.00 per kg of milksolids holds true for the 2013/14 season, economists said.

At that level, the milk price would be a $1.20 per kg, or 20.7 per cent, improvement on the forecast for the 2012/13 season, which ends on May 31.

Economists estimated the $2b boost would represent about 1.25 per cent of nominal gross domestic product.

Dairy makes up more than one quarter of New Zealand's merchandise exports.

"It is certainly a big lift in expected dairy industry returns and it will be fairly significant support for economic growth if it pans out," Bank of New Zealand economist Doug Steel said.

Westpac economists said the Fonterra announcement, combined with a forecast post-drought rebound in local production, meant 2013/14 was shaping up as a bumper season. "Combined with the expected rebound in production, this is a sizeable boost to New Zealand Inc income," the bank said.

Fonterra was nevertheless cautious about the prospects, and said prices may have peaked. The cooperative said it was holding its current forecast farmgate milk price for the current season at $5.80 per kg, and a forecast dividend of 32 cents per share, amounting to a cash payout of $6.12 for a fully shared-up farmer. The forecasts for the current season, and the upcoming seasons, are subject to revision.

Chairman John Wilson said farmers would need to be cautious in managing their budgets. He said the higher forecast milk price for the new season reflected continuing strong international prices for dairy. "The general consensus is that dairy commodity prices have peaked but will continue at or near current levels until the fourth quarter of 2013," he said.

For the manufacturing side of Fonterra - which pays the dividends for the cooperative - the higher milk price means a commensurate increase in its input costs.

To that end, chief executive Theo Spierings said shareholders and Fonterra unit holders should expect the strong lift in international dairy powder prices to create "a more challenging environment" for Fonterra's earnings in the first half of the 2014 financial year to July 31.

Higher input costs arising from the higher milk price would have an impact for Fonterra's branded businesses, and he expected the cooperative to "take a hit" on margins.

Wilson said a large proportion of its farmer shareholders have experienced drought conditions, which had a significant impact on feed costs and production.

In a move aimed at lessening the pain for drought-affected farmers, Fonterra confirmed a higher advance rate schedule, with an opening rate of $5.00 per kg, in part reflecting the higher forecast for 2013/14. The cooperative has a policy of paying out 60 to 70 per cent of the forecast milk price in advance payments, but had in this instance gone to 71 per cent.

The board will announce its forecast cash payout - which comprises the forecast farmgate milk price and dividend for the 2013/14 season - in July when Fonterra's budget is approved.

Spierings told APNZ the drought had taken the shine off what would have been a strong season. Before the drought, production was running six per cent ahead of the previous record year. "That six per cent has gone down to a small negative."

He said volatility on world commodities markets meant Fonterra had taken a cautious approach. "Basically, that means don't finance your farm at around a $7.00 milk price."