Fonterra raises forecast payout

Henry van der Heyden

Fonterra has lifted its forecast payout for this season for the second time in three months. But the dairy giant tempered the rosy outlook with a warning that the strong kiwi dollar could crimp next year's earnings.

Fonterra chairman Henry van der Heyden said the highest commodity prices in 15 years allowed it to lift its forecast payout by 25c per kilogram of milk solids from $4.05 to $4.30 for 2004/05.

For the average shareholder, producing about 100,000kg each year, this represents a gain of about $25,000.

In October, Fonterra raised its forecast payout from $3.85 to $4.05.

Chief financial officer Graham Stuart said world demand was to some extent outstripping supply. This was being driven by China and by high oil prices boosting the economies of oil-exporting countries.

However, van der Heyden warned farmers not to expect such prices to last indefinitely. US dollar weakness could hit Fonterra's NZ dollar earnings. Commodity prices could fall and were unlikely to rise higher. The strong kiwi, now trading around 72USc, could affect next season's payout.

"We are giving farmers a real note of caution as they look into the next financial year," van der Heyden said.

The average conversion rate in this year's payout was between 61USc and 62USc.

"So if the exchange rate stays where it is, and everything else stays equal around higher commodity prices, that'll have an impact of around 60c per kilogram of milk solids next year."

Put another way, Fonterra is hedged 15 months' in advance and van der Heyden said the $4.30 forecast payout included almost 60c worth of currency hedging gains.

Kevin Wooding, chairman of Federated Farmers' dairy industry group, said the increased forecast payout was "really positive" for farmers and Fonterra's performance was improving slightly.

But Wooding said the kiwi's strength concerned him. "If the dollar stays up there for a while, and the commodity prices ease back, it will have quite an influence in reduction on our payout."

He said payouts above $4 might not be sustainable next season and farmers should continue their prudent approach so they could weather any possible future downturn.

The increased $4.30 forecast is still well below Fonterra's 2001/02 $5.30 payout but slightly higher than last season's $4.25.

A 30 per cent rise in commodity prices last season in US dollars offset the strengthening kiwi.

Fonterra also raised its estimated fair value share price for 2005/06 by 42c or 9 per cent from $4.69 to $5.11. This price was chosen by the co-operative's directors from a range calculated by Standard & Poor's Corporate Value Consulting.

The final share price will be set before the next dairy season starts on June 1.

Fonterra refused to comment on talk it may have to raise its A$5.45 a share bid for Australia's National Foods. It said yesterday it had received approval from Australia's Foreign Investment Review Board to buy the company.

Creaming it

* Fonterra has increased its forecast payout for this season by 25c to $4.30 per kg of milk solids.

* It also raised its estimated fair value share price for the 2005/06 season by 42c to $5.11.

* The dairy co-op says high global commodity prices may not last, while the strength of the kiwi dollar against the greenback could hit earnings.