New dairy boom tipped to last

An extra 40c in milk prices will be welcomed by farmers. Photo / Mark Mitchell

Fonterra has boosted its milk price to the second highest level on record and told farmers to expect the same again next year.

Fonterra, which processes about 92 per cent of the country's milk, yesterday increased its milk price forecast for this season by 40c to $6.10 a kg of milksolids, compared to $4.72 last season.

The co-operative also reaffirmed a profit forecast of 40-50c a share, with a target dividend of 20-30c a share.

Westpac bank estimated industry-wide income this season, including retentions, would be up $1.8 billion on last season, while in-hand income for farmers would be about $8.8 billion - up $1.6 billion.

Fonterra chairman Sir Henry van der Heyden said a more formal forecast for the next season would be done at the end of next month but farmers should budget for a milk price around this year's level.

The extra 40c in the milk price would be welcomed by farmers and confirmed that 2009/10 was shaping up as the second best in terms of cash payments to the company's shareholder farmers, van der Heyden said.

"However, it comes at a time when many farmers, especially those north of Taupo, are suffering from worsening drought conditions," he said.

"Many of them are being forced to dry off their herds early this season, so unfortunately what they will gain in farm income through the higher milk price they may lose through lower production."

Fonterra said North Island production was down 4.5 per cent against budget for the year to date, while the South Island was up 3.1 per cent.

Chief executive Andrew Ferrier said the drought meant that production was expected to be similar to last season, compared to a modest increase that had been forecast at the start of the season.

BNZ economist Doug Steel said budgets needed a little bit of leeway because the world was still a very volatile place.

"We still need to bear in mind that you've only got to look at the last [Fonterra global DairyTrade] auction [price] rocketing up more than 20 per cent," Steel said.

"It's okay while it's going up and that's certainly good news.

"But you do have to be a bit mindful that the worrying sign from that is the continuing volatility and it may pull back at some stage and that's the risk that still remains."

Westpac chief economist Brendan O'Donovan said a number of New Zealand's commodity categories were doing very nicely in the current environment.

A lot of the benefit from higher commodity prices was spread around the economy through a higher exchange rate, O'Donovan said.

"All of us as consumers, our money's going further," he said. "The other one is the income via the farmers and then through provincial New Zealand as they spend."

Farmers were in a paying down debt mode, O'Donovan said.

"At the moment they're in pretty conservative mode, everyone got a hell of a shock last year post the global financial crisis."

Federated Farmers dairy chairman Lachlan McKenzie said a large percentage of farmers had banks looking closely at their budgets, and confidence had been severely dented by the recession.

McKenzie said: "Our advice to farmers is very much talk with their consultants, sit down and do their budgets and work out where their priority is."

Fonterra forecast:

* Milk price of $6.10 a kg of milksolids, up 40c.

* Profit forecast of 40-50c a share.

* Target dividend of 20-30c a share.

* Second highest milk price since Fonterra was formed in 2001.

* The 2007/08 milk price was a record $7.59 a kg of milksolids.

* Westpac estimates industry-wide farmer income of about $8.8 billion - up $1.6 billion on last season.