Fonterra's record forecast

Fonterra's forecast will give CEO Theo Spierings something to smile about. Photo / Sarah Ivey

Economists predict windfall will provide big boost to New Zealand's growth outlook.

Fonterra's food contamination scare was put quickly into perspective yesterday when the giant dairy co-operative raised its 2014 farmgate milk price payout to a record $7.80 a kg of milk solids, which economists say should have positive implications for New Zealand's already sturdy growth outlook.

If the forecast comes to pass, it will be the highest milk price ever paid to farmers - surpassing the previous record, set in 2010-11, of 7.60 a kg.

Economists said the 30c revision alone would add about $500 million to dairy sector revenue this year. The sector is now looking at taking in $3.5 billion to $4 billion more in revenue compared with 2012/13.

With that kind of growth it now looks as if the dairy sector will rival the already very strong construction sector in terms of its contribution to GDP growth over the coming year, according to economists.

Fonterra's increased forecast comes with a previously announced estimated dividend of 32c a share. This amounts to a forecast cash payout to Fonterra's dairy farmers of $8.12, which would also be a record.

Chairman John Wilson said the two most recent GlobalDairyTrade auctions had seen prices hold, and significant volumes sold. Both factors had contributed to the updated forecast, he said.

Fonterra has been in damage control mode since China placed a temporary suspension on imports of whey powder, whey protein concentrate and dairy base powder, thought to contain bacteria that can cause botulism.

The co-operative has also struck trouble in Sri Lanka over a DCD scare. At the weekend, a Sri Lankan court overturned an order that was preventing Fonterra from selling and promoting products there.

ANZ rural economist Con Williams queried the timing of yesterday's announcement, given its proximity to Fonterra's annual result scheduled for September 25. He presumed it was to shore up confidence after recent events.

"It is obviously a huge windfall," said ANZ senior economist Mark Smith, adding that it would go some way to offset the large debt overhanging the sector.

Bank of New Zealand economist Doug Steel said the forecast reflected continued strong prices and a softer exchange rate.

"Against the background of the contamination scares, it certainly underlines just how strong the international dairy markets are and have been for a while," Steel said.

Compared with last year, the Bank of New Zealand estimated the sector would generate an extra $4 billion in revenue - about 2 per cent of GDP - over the course of 2013/14.

Federated Farmers dairy sector chairman Willy Leferink said "a roller-coaster month to forget" looked set to end on a high.

"It has been a hellishly tough month for Fonterra but this revision underlines that the fundamentals of the New Zealand dairy industry remain strong."

- Radio New Zealand is this morning reporting that Bangladesh has restricted imports of powdered milk, mostly from Fonterra, following a contamination scare.

RNZ says customs officials in the port city of Chittagong are holding more than 600 tonnes of powdered milk until mandatory chemical tests show the product is safe. They have been instructed to hold consignments of milk at the border following the August 3 botulism recall.