Fonterra picked to increase payout

The auction price for whole milk powder is up for the fifth month in a row. Photo / Sarah Ivey

Fonterra is expected to announce an increase in its payout forecast to farmers early next week after another boost to its online dairy auction.

The co-operative's internet-based sales platform, globalDairyTrade, saw a 13.7 per cent increase in the average price for whole milk powder for its November session yesterday.

The US$415 per tonne rise to US$3437 is still a long way short of the peak US$5000 per tonne reached in 2007 but it is now the fifth month in a row that prices have risen.

Nigel Kuzemko, director commercial and strategy for Fonterra trade and operations, said an increase had been expected but the 13.7 per cent was better than hoped for.

Kuzemko believed the jump was a reflection of customers refilling their supply chains amid growing consumer demand and confidence.

"This is a reflection of the prices that buyers are prepared to pay on the day to secure product in these contract periods."

However, he said, the recovery in consumer demand remained relatively fragile.

Westpac chief economist Doug Steel said the price rises appeared to be sustainable at least in the short term.

"There seems to be so much momentum in the last few months."

Steel said the recovery in the dairy auction price was being driven by the recovery in the world economy.

A sustained increase in prices would depend on that continuing.

Steel said economic indicators were pointing to that happening with the US Federal Reserve expected to keep interest rates low for some time.

"It's good news for dairy farmers and the wider economy."

But Steel said it was hard to know how soon prices would return to the US$5000 a tonne high seen in 2007.

Steel said the auction price rise would put further pressure on Fonterra to increase its forecast payout to farmers for the 2010 season.

"Even prior to last night's auction there was upside risk to the milk price. With another 14 per cent lift that would certainly give them the confidence to increase it."

Steel picked the milk price to rise to $5.50 per kg from $5.10 and said it could go higher still as there was still some time to go before the end of the milking season in May.

But Kuzemko was more conservative. He said there were a number of factors that went into setting the dairy payout price, including exchange rates and costs to farmers for production.

The Fonterra board was keeping a "watching brief" and would review the price early next week.

Kuzemko said there were still risks and there were a few months to go before the end of the year.

Steel said much had been made of the high New Zealand dollar being bad for exporters but he believed it was a reflection of the strength of New Zealand's economy and the desire by consumers to pay more for New Zealand's products.

But he doubted the lift would encourage farmers to open their wallets just yet.

If it goes ahead the forecast payout increase would be the second made in a matter of months.

In September, Fonterra boosted its forecast by 55c/kg to $5.10/kg.