Fonterra hikes forecast payout

Dairy cooperative Fonterra has increased its payout by 95 cents to $6.05 per kg of milk solids.

This is a significant rise from the $5.10 per kg announced in September.

Fonterra chairman Sir Henry van der Heyden said the higher forecast reflected the cooperative's increasing confidence around the recent gains in international dairy prices.

That was despite the recovery in consumer demand and the global economic situation remaining relatively fragile.

The improvement in global dairy markets reinforced that dairying was in good heart with sound long-term prospects, both for Fonterra shareholders and the broader New Zealand economy, Sir Henry said.

But he also cautioned that the size of the rise in the payout forecast showed how much volatility was in the market.

"It's heading in the right direction and we're making the most of the opportunities for our farmers. But, we also know there's a risk of rapidly rising prices potentially bringing on more milk from other countries. We saw this happen in 2007 and we saw how quickly the market can fall as a result," Sir Henry said.

The new $6.05 payout forecast includes a $1.10 rise to $5.70/kg milksolids for the milk price part of the total, but the distributable profit part fell 15c to 35c/kg milksolids.

Fonterra chief executive Andrew Ferrier said improving market conditions for dairy commodities had been reflected in recent trading events on Fonterra's globalDairyTrade online platform, which in the last financial year accounted for about 10 per cent of Fonterra's sales.

Since the September forecast revision to $5.10, there have been two monthly trading events, the most recent when whole milk powder (WMP) prices rose by an average 13.7 per cent.

Over the past four months, average WMP prices on gDT had risen by a total of 88 per cent.

There was a tight supply situation globally for many dairy commodities, reflected in current pricing.

Fonterra also recently confirmed some key contracts with major customers, further improving confidence about the season's outlook, Ferrier said.

"Although prices for all dairy products are now increasing, the recovery has been strongest across the range of commodity milk powder streams that are used as the basis for the milk price component of payout to Fonterra farmers.

"This is good for our farmers, as it drives a higher milk price, but it is putting profits under pressure," he said.

Prices for non-powder products such as cheese and casein had not risen at the same rate as powder prices. Under Fonterra's new milk price, if Fonterra could not achieve an equivalent return for those products compared to milk powders, the difference came off profit.

That was the primary reason for the cooperative's forecast reduction in profit, Ferrier said.

Although Fonterra expected the differential in returns to recover over the medium term, returns for non-milk price products were forecast to be lower, relative to powders, for the remainder of the current financial year.

As a consequence, the distributable profit (value return) forecast had been cut by 15c to 35c.

The other business units that contributed to profit - principally the consumer Brands businesses and global dairy ingredients and foodservices - continued to perform well and their expected earnings for 2009/10 remain unchanged from previous forecasts.

The high exchange rate of the New Zealand dollar against the greenback would have a negative impact when the profits were converted back into NZ dollars.

"The high dollar is certainly hurting earnings, and the level of volatility is making forecasting a challenge," Ferrier said.

The opening forecast for 2009/10 was based on an exchange rate of US59c to the NZ dollar, which had recently been trading as high as US76c.

"Although recent exchange rates have been fully factored into the revised forecast, and we have a portion of hedging in place at this stage of the season, there remains significant uncertainty about the medium to longer term exchange rate outlook," Ferrier said.

- NZPA