Fonterra lifts payout by 30c

Dairy giant Fonterra has boosted its multi-billion dollar payout to farmers as international dairy prices stay strong.

The farmer co-operative this morning raised its payout for the 2010/11 season by 30c to $7.30 - $7.40 per kg of milksolids before any retentions.

A $7.40 per kg payout based on stable production could be worth about $9.5 billion to Fonterra's 10,500 farmers.

Chief executive Andrew Ferrier said international dairy market prices had generally held up better than initially expected when the company made its opening forecast in May.

"Offsetting this good news has been a stronger New Zealand dollar which is eroding the value of dairy export returns for our farmers," Ferrier said.

Fonterra's online auction on December 1 had been a solid result with average prices 1.5 per cent higher than a month earlier, he said.

"This has added to our confidence in the season's outlook."

Global markets for key dairy ingredients remained finely balanced, with solid demand being underpinned by some growth in supply out of the northern hemisphere, he said.

The new forecast comprised an increased milk price $6.90 per kg of milksolids and an unchanged distributable profit of 40-50c a share.

Chairman Sir Henry van der Heyden said the decision to raise the forecast milk price reflected the continuation of high international dairy prices further into the season.

A new report put out by the New Zealand Institute of Economic Research this week said that more than $1 billion is pumped into the economy every time Fonterra boosts its payout to farmers by $1.

Van der Heyden said the board's decision to raise the forecast milk price reflected the continuation of high international dairy prices further into the 2010/11 season.

Ferrier said global markets for key dairy ingredients remained finely balanced, with solid demand being underpinned by some growth in supply out of the northern hemisphere.

Ferrier said Fonterra was reviewing the potential impact of the recent dry conditions around New Zealand on anticipated production levels, and would update the board in due course.

Van der Heyden aid that while farmers would no doubt welcome news of a higher forecast milk price, they were potentially facing much higher input costs if current dry weather continued.

"It is still early in the season, and some good falls of rain could help a lot, but milk production in the North Island is declining and we know farmers in some regions are struggling," he said.


Goldman Sachs economist Philip Borkin said the forecast payout lift had come at a time when a number of North Island farmers were facing higher input cost pressures due to dry weather.

"Therefore these higher incomes help to offset the downside risks present from an intensifying drought. For rural service providers, this will be a welcomed development."

Borkin said drought was "a clear downside risk for the economy".
Today's higher payout helped to mitigate that downside risk to a degree.

He cast some doubt on the notion that high dairy payouts were having much of a wider benefit through the rest of the economy.

"Our view on the dairy sector is that high incomes are not necessarily flowing through to the rest of the economy through farmer spend as they have in the past," said Borkin.

"Yes, higher incomes (and the drought itself) is positive for direct rural service providers but high indebtedness and falling land prices are constraining capital and discretionary spend."

"Nonetheless, these high incomes are allowing the deleveraging process to occur in a less painful manner than would have otherwise been the case."

This week's NZIER report said dairy exports for 2009 were $10.4 billion, which accounted for about 26 per cent of total goods exports.

The report showed a huge spill-over from farmers' spending money into their communities and to New Zealand as a whole from having a better balance of payments, said Ferrier.

Of the total export value, $7.5 billion was spent on raw milk purchases from farmers, of which $3.6 billion was spent on domestically produced inputs including fertiliser, feed and agricultural and financial services.

NZIER deputy chief executive John Ballingall said modelling showed the sector had delivered significant and ongoing benefits.

"Its influence extends well beyond its direct impacts in dairying areas, with the sector closely intertwined with the rest of the economy," Ballingall said.

"That includes the jobs it delivers, the income that these workers earn, its links to supply firms, the effects of rural economic growth on urban centres and the tax revenue it provides to fund public services."

The dairy sector accounted for 2.8 per cent of gross domestic product, equivalent to $5 billion, and employed 35,000 people (excluding self-employed), the report said.

Independent valuer Grant Samuel estimated a 'restricted market value range' for Fonterra shares at between $4.11 and $4.78.

The mid-point is $4.45 a share. The exporter's board estimates fair value to be $4.52 a share.

Fonterra will allow share trading between farmers after they voted in favour of capital structure changes to inject cash into the cooperative.

Almost three-quarters of shareholders bought an extra 13.5 million tradable shares worth $61 million when the offer closed at the end of September.

- With NZ HERALD ONLINE/ BUSINESSDESK