Fonterra's payout rise set to pump extra $770m

Dairy giant Fonterra has boosted its forecast payout to farmers to record levels as international prices keep rising.

The farmers co-operative yesterday raised its forecast payout for this season by 60c to $7.90-$8 per kg of milksolids before retentions.

With milk production expected to be broadly in line with last season an $8 payout could be worth about $10.3 billion.

Chairman Sir Henry van der Heyden said the increased forecast milk price reflected strengthening international dairy prices during recent months.

Prices in Fonterra's bi-weekly online auction last week were pushed to the highest level since it was launched in July 2008 - up 24 per cent since the start of December.

"We are in a time of volatility and uncertainty," van der Heyden said.

"There are dynamics around supply and demand that's changing all the time.

"We've seen one-off weather events around supply, that's driving some of this, we're still seeing robust demand around the world."

It was difficult to predict prices too far forward but in the short term the market still looked firm, he said.

The forecast payout incorporated a milk price of $7.50 per kg of milksolids and a distributable profit of 40-50c, with fully share-backed farmers expected to get $7.75-$7.80 after retentions by the co-operative.

Chief executive Andrew Ferrier said higher dairy market prices appeared to be driven by a combination of strong demand from China and other Asian markets, and tight international supply due to adverse weather conditions in many parts of the world.

"These higher prices have more than offset the negative effects of an appreciating Kiwi dollar against the US dollar," Ferrier said.

Global supply was growing despite the impact of weather, although at a slower rate than previously expected, he said.

Fonterra estimated global milk production in 2010 grew by 1.8 per cent.

During 2009/10, Fonterra collected 14.7 billion litres of raw milk from 4.5 million cows, about 89 per cent of national milk production.

BNZ economist Doug Steel said he was watching more closely events in the Middle East, with spreading political unrest having a more marked impact on oil prices.

In the past decade or so higher oil prices had been driven largely by emerging world demand, Steel said.

"When it's demand driven you tend to see prices for our products going up as well," he said. "It's a lot different when oil price is driven up by supply side tensions or risk of disruption in supply, which is happening in the last few days ... it just lifts costs, you don't tend to get the higher prices for our products."

The extreme volatility during the last few years had made farm planning and budgeting difficult.

"Certainly this season's payout is one of the best ... it would be pretty wise given ... the volatility that we've seen that looks likely to continue, to put a bit away in the bank account," Steel said.

PRICE FOR MILK
* Forecast payout lifted to $8 per kg, up from $7.40.
* $772m potential value of increase.
* $10.3b possible value of payout.