Fonterra payout lift a boost for economy

Fonterra farmers look set to get a payout starting with a six dollar figure for the current season with the dairy company lifting its previous seasonal forecast range by 25c.

The new forecast for 2012-2013 is $5.90-$6 before retentions for a fully shared up farmer.

The hefted forecast means the milk price outlook is $5.50/kg milksolids for this season, up from the previous forecast of $5.25.

The lift in forecast came as no surprise to economists or the market, with the Kiwi dollar at US 83c today barely registering the announcement.

BNZ economist Doug Steel said average prices at Fonterra's Global Dairy Trade (GDT) auctions - which help determine the payout level - had "outgunned" the Kiwi dollar since lows in mid-May.

He said it could be taken from Fonterra's announcement that the company, the world's biggest dairy exporter, had confidence in the second half of the dairy season next year.

"It's a tick in the box we didn't know before, and it's positive for the economy."

Steel believed the forecast was "fair" at the moment given the strength of the Kiwi dollar and international prices.

While international supply was looking to be a "bit tight" next year which could strengthen prices, there were still the risks like the US "fiscal cliff" and Europe's debt situation on the radar to consider.

However it had been good to see China's growth outlook for the rest of this year stablilise and even improve slightly.

Also unsurprised was Westpac, which three weeks ago lifted its own payout forecast from $5.70 to $6, citing rising product prices on global markets.

Westpac noted at the time that prices on GDT had risen almost 30 per cent since May, which was only partially offset by a 5 per cent strengthening in the Kiwi dollar over the same period. .

Prices in last week's GDT auction had fallen slight but the outlook remained unchanged, said Westpac.

"We expect recovering economic activity in China to drive demand for dairy products, while drought conditions in the US constrain supply - a combination that should result in higher prices."

The Fonterra board also announced today a forecast net profit after tax range of 40-50 cents per share, consistent with the recent Fonterra Shareholders’ Fund Offer prospectus and a 40 cent increase in advance rate payments to farmers.

Fonterra is required to consider its farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).

Chairman Sir Henry van der Heyden said after considering farmer shareholders’ cash flow requirements, and the strength of the farmer co-operative’s balance sheet after the launch of Trading Among Farmers (Taf), the board had also decided to lift advance rate payments to farmers.

"The immediate effect of this decision is that our farmers will have more money flowing into their bank accounts from late January when they are paid for the previous month, and that will help them with their cashflows.

"Between 1 August and the most recent GlobalDairyTrade trading event, prices have increased by an average 17.7 per cent.

"While there was a drop at last week’s GDT event, it has not changed our overall commodity price forecasts."

Chief executive Theo Spierings said Fonterra’s strong balance sheet meant that from a cash flow point of view the co-operative was in a position to increase payments to farmers over the next few months without any significant risk to its financial stability.

Spierings said while the outlook for any movements in the New Zealand dollar exchange rate were neutral, the impact of weather events in other markets were likely to support the lift in forecast farmgate milk price.

"There has been a persistent, serious drought in the United States.

"That has pushed up the price of grain, which in turn affects dairy production. There are also concerns about drought in the Ukraine and Russia.

"In South America, extreme wetness in parts of Brazil and Argentina could also depress wheat production," Spierings said.

"Given current global conditions, our forecasting anticipates global dairy prices are likely to move higher in the first half of 2013."