Fonterra forecast tipped to rise again

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Fonterra is expected to lift its payout forecast for this season by at least 30 cents a kilogram of milk solids after a board meeting on Thursday.

The dairy industry expects the co-op to reveal the payout boost in an announcement on Friday in which it will also re-set the price of its fair value shares and make its initial estimate of the payout for the 2008-09 season.

According to industry sources, Fonterra has been telling farmers at recent meetings to expect a pleasant surprise with the payouts for this season as well as next year.

Its current payout forecast for 2007-08 is $7.30. Fonterra has a policy of revising payout estimates, other than its regular updates, only for movements of at least 30 cents, so a payout of at least $7.60 for this season is expected.

That would be higher than the current estimates of Goldman Sachs JBWere - $7.40 - and Westpac's $7.50.

"It would be a mild surprise if the current season's payout was $7.60 or more," Westpac agri-economist Doug Steel said.

Fonterra's New Zealand production was expected to be down about 3 per cent on last year because of the drought.

Fonterra suppliers may not see all of this season's payout increase.

The co-op's chairman, Henry van der Heyden, said last month that the co-op would consider retaining some of this season's payout because of the instability in global financial markets.

Next year's payout is expected to reflect the slight easing in world dairy prices in the past six months. Goldman Sachs JBWere is picking $6.25 a kilogram of milk solids for 2008-09, and Westpac $6.50.

Fonterra gave the drought as its main reason for lifting its payout forecast last month.

A subsequent lift for 2007-08 and a more optimistic view for 2008-09 may be due to the fact that most dairy commodities, except skim milk powder, have been holding their prices in the past couple of months.

"We're certainly seeing some stability at the moment," said Rabobank analyst Hayley Moynihan.

"The stabilisation is being viewed pretty positively in light of the fact there's more product coming out of the northern hemisphere at the moment."

Mr Steel said that dairy prices, other than skim milk powder, had not eased by as much as might have been expected.

"Commodity cycles are usually fairly pronounced. This time round it seems like prices have held up at the top for a little bit longer than in the past."

Across the Tasman, one of Fonterra's rivals in the race to buy Dairy Farmers told the Australian Competition and Consumer Commission that it will split up Dairy Farmers if it succeeds in buying it.

Italian dairy company Parmalat, in combination with Victorian co-op Murray Goulburn, said it would create a new company, to be 51 per cent-owned by Parmalat, which would merge the fresh milk operations of Dairy Farmers, Parmalat and Murray Goulburn.

Under the proposal, Murray Goulburn would acquire the non-fresh dairy operations of Dairy Farmers, including cheese, UHT milk and milk powder.

Murray Goulburn/Parmalat, Kirin-owned National Foods and Fonterra are regarded as the frontrunners to buy Dairy Farmers. Final bids of A$1 billion to A$1.1 billion are expected.

- © Fairfax NZ News