Fonterra boosts dairy farmer income by $20,000

By ELLEN READ


The country's 12,000 farmers have each received a $20,000 pay rise with Fonterra lifting its forecast payout by 20c to $4.05 per kilogram of milksolids.

"It's about $300 million extra in the economy so that's a reasonable fillip," Westpac economist Richard Sullivan said.

The boost will soften the slowdown in the rural economy - but is still $300 million short of last year's $4.25 per kg/ms Fonterra contribution. Average farm supply is about 92,000 kg/ms.

"We still think there will be a bit of a slowdown in spending in rural areas, just not as great. It backs up our view that there will be a gradual slowdown in the economy next year," Sullivan said.

Fonterra yesterday also increased the advance payout rate for milk to $2.90 kg/milksolids - effective from November 20. The season ends on May 31, 2005.

Chairman Henry van der Heyden said strong demand and high commodity prices prompted the revision.

"This revised forecast, early in the season, will be welcomed by farmers who have had a tough start to the season because of the wet cold spring."

Van der Heyden said the improved forecasts would help offset the currency impacts Fonterra has signalled would be worse in this season.

The dairy company will convert its earnings this season at an average exchange rate of US60c-US62c compared with US52c last season.

Sullivan said Fonterra's 15-month ahead hedging policy could protect farmers only for so long.

"Exchange rate rises over the last 15 months are only starting to hit dairy farmers now. They've basically delayed the exchange rate rise but you can only delay it, you can't hide from it forever," he said.

Sullivan sees another pay cut for farmers next season with a forecast payout of $3.55 per kg/ms but cautioned it was hard to estimate this far out.

"We believe there will be further exchange rate impacts as the higher exchange rate from this year starts to impact.

"Plus we expect commodity prices to drop off a bit," he said.

Van der Heyden said Fonterra's board was increasingly confident the strong prices would hold into next year, although an uncertain world economic outlook added some risk.

No mention was made of the likelihood of further increases to the payout. Fonterra's board reviews the numbers quarterly.

Van der Heyden said while high commodity prices reflected well in Fonterra's payout, they meant increased costs in the company's value-add businesses.

"But our shareholders understand this dynamic and appreciate that the value-add businesses come into their own when commodity prices are low, providing farmers with the best of both worlds," he said.

Fonterra's consumer business, New Zealand Milk, and its value-add businesses, Ingredients, were doing "everything possible to recover these higher costs".