Fonterra, the world's largest dairy exporter, announced the strongest balance sheet in its 9-year history after allowing farmers to buy more shares and affirmed its 2011 milk payment.

Although business conditions remained volatile, customer demand returned and international dairy prices rose sharply, the company said.

The Auckland-based dairy group posted a 12.3 per cent lift in profit to $685 million for the year to July 31, including $174 million of one-time gains from asset sales.

The profit was helped by significant gains on hedging foreign exchange,
higher commodity prices and steady costs.

Its gross payment to farmers is $6.70, including $6.10 per kilogram of milk solids and a higher-than-expected distributable profit 60 cents per cooperative share.

It will pay a dividend of 27c a share (8c of which had already been paid) and retain 33c a share. The balance of the payment to farmers will be made next month.

Fonterra's gearing ratio shrank to 44.9 per cent at July 31, from 53 per cent a year earlier, reflecting an inflow of $459 million in additional shares and increased retentions. Net debt fell to $4.5 billion from $5.2 billion.

Federated Farmers Dairy chairperson Lachlan McKenzie said the result "puts to bed, once and for all, the notion that New Zealand's farmers made the wrong choice in keeping Fonterra as a cooperative."

"We have a world scale corporate that is completely New Zealand owned and farmers are determined to keep it that way," he said.

However budgets should remain conservative with in-season volatility now upwards of $2kg/ms, McKenzie said.

Fonterra's 2011 milk payment was affirmed at $6.60 a kilogram, though it lifted forecast distributable profit to a range of 40-50 cents from a previous forecast 30-50 cents.

"To come through the economic crisis that has happened over the past couple of years to have a blanace sheet where we are - our farmers will take a lot of pride in that," Chairman Henry van der Heyden said.

Sales in the latest year climbed 4.3 per cent to $16.7 billion, with the improvement reflecting a 7 per cent increase to $11.2 billion for Commodities & Ingredients.

Revenue at its consumer businesses was little changed at $5.5 billion, mainly reflecting adverse currency movements.

Meanwhile Fonterra says it's too early to say how the Canterbury earthquake and recent bad weather might have affected milk production in recent weeks.

"September is only one month out of several months of the year where farmers produce milk. We are not sitting here feeling nervous about our milk production."

"You can measure (the loss) in very small single percentages," the company said.

Chief executive Andrew Ferrier said there are signs supply and demand in global markets are moving more into balance at current prices though there is still "considerable volatility."

The cost of goods sold rose to rose to $14 billion from $13.2 billion a year earlier.

Farmers have increased their share holdings after approving a plan that allowed them to hold up to 120 per cent of their annual production.

The cooperative is preparing to allow farmers to trade the shares among themselves, ending its redemption risk.

- BusinessDesk / NZ Herald Online