Dairy continues stunning rise

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Another jump in this year's dairy payout is predicted to come as soon as next week as international dairy commodity prices continue a spectacular recovery.

Yesterday economists and farmers were tipping that a payout of $5.50 a kilogram of milksolids would be announced by Fonterra at a board meeting early next week.

The 40-cent increase on the forecast for the year ended June 2010 payout would pump more than $500 million extra into the economy.

One delighted farmer was predicting the end-of-season figure would be in the $6 range and an analyst confirmed that if current factors remained constant – although unlikely in a volatile world economy – the payout would be around $5.80.

The speculation was fuelled by another big jump in whole milk powder prices in Fonterra's global auction overnight. Price rises averaged 13.7 per cent above those at the October auction and continued a recovery that has added 88 per cent to whole milk powder values in the past four months.

Anhydrous milkfat – effectively dehydrated butter – was auctioned for the first time and prices continued the spot market's upward climb that has recorded gains of more than 100 per cent since March.

Other commodities including butter, skim milk powder, cheese and casein are also increasing on the spot market, although not at the dizzying rate of whole milk powder.

The auctions sell only 10 per cent of Fonterra's production but are regarded by the industry as a reliable indicator of market values.

Westpac economist Doug Steel pointed to a 20 per cent rise in the price of whole milk powder for delivery in May to July next year as a sign that the "stunning" price lift would not tail off soon.

He expected Fonterra to set a new payout figure in the "mid $5", although whether it would stay at that level would depend on how the world economy performed.

"Indications at the moment are certainly very positive and commitments from the major central banks suggest that interest rates are to remain very low for a while. This is likely to fuel a rise in the world economy generally and in commodity prices especially."

A $5.50 payout forecast would be a huge advance on the $4.55 prediction considered to be optimistic earlier this year. But farmers would greet such a rise warily, Mr Steel said. "They are likely to be breathing a sigh of relief rather than jumping for joy and getting their wallets out."

NZX Agrifax analyst Philip van Polanen was picking a new payout forecast of $5.40 or more.

"At that, Fonterra would still have room to breathe if the run eases; they'd still be OK." He said the price rises reflected a shortage of supply at a time when European production was at a seasonal low.

The possibility of an El Nino weather pattern returning this summer had also spooked some buyers. Memories remained of a milk shortage during the 2007-08 drought and they did not want to find themselves caught next year.

He cautioned against expecting the price rises to continue.

"There's nothing to say that come early 2010 this run of demand won't lose a bit of oomph if some of the Europeans are tentative about purchasing at these levels."

Although farmers in Waikato were thrilled with the auction results, with Te Awamutu dairy farmer Pete Morgan expecting a 90c payout rise by year's end, Federated Farmers dairy chairman Lachlan McKenzie was more cautious.

"There's still a long way to the end of the season and who knows what the exchange rate will do."

However, Fonterra had a formula to follow for setting the milk price and a lift in the payout would not surprise.

"The auction results are excellent news for New Zealand.

"It means more money is coming in than previously.

"Farmers will be able to pay off some of New Zealand's debt and that will be a big help – no-one else is paying the bills."

- © Fairfax NZ News