Dairy giant Fonterra has dished out a double dose of good news for farmers and New Zealand Inc, announcing a bumper opening season milk price, most of which it will pay out soon to ease the lingering pain of the drought.
If the $7/kg milk price holds over the new season, the economy is set for a dairying injection of $12.3 billion over the next 18 months, BNZ senior economist Doug Steel estimates.
That is $2b higher than this season's milk price forecast.
The opening milk price for the new 2013-2014 dairy season beginning on Saturday is $1.20/kg milksolids higher than the current season's milk price forecast, which has yet to be finalised.
Fonterra chairman John Wilson said the higher opening milk price reflected continuing strong international dairy prices. In the past 12 months, average international prices have lifted by 60 per cent.
Fonterra's opening advance rate will be $5/kg, which is 71 per cent of the $7 milk price forecast. Normally the advance rate would be more like 65 per cent, Wilson said.
The decision to open with a $7 milk price was based not only on global prices, but on strength of Fonterra's balance sheet and acknowledgment that its farmer-shareholders had experienced a tough time in the past few months because of drought and would continue to be challenged because of its effects in the next six months, he said.
The $7 milk price was Fonterra's ''best estimate'' on price for the next year, he said.
New Zealand's biggest company and the world's leading dairy exporter will not declare its forecast cash payout - the milk price and dividend - for the current 2012-2013 season until July, when Fonterra's budget is completed and approved by directors.
Meanwhile, the company was holding the current season's forecast payout of $6.12 for a fully shared up farmer, comprising a $5.80 milk price and a forecast dividend of 32c.
Wilson cautioned farmers to be careful in managing their budgets around this $5.80/kg current milk price because of the drought-driven ''significant'' fall in milk production.
''This had a huge impact on our efficiency, it meant our plants were very poorly utilised. We haven't had the milk to sell into the high (international) prices.''
Fonterra's legislated obligation to provide a percentage of its annual milk collection to small competitors had also eroded processing capability in the drought, Wilson said.
He did not forsee much movement above $5.80/kg when Fonterra balanced the books at the end of its financial year, July 31.
The size of the milk production decline this season would not be known until next week but was estimated to be around 1.5-2 per cent down on last season, Wilson said. This was a dramatic change given at the end of February, milk collection had been 6 per cent up on last season's record volume.
The company warned shareholders and holders of its NZX and ASX units to expect the strong uplift in international prices to create a more challenging scene for Fonterra's earnings in the first half of the 2014 financial year.
Wilson said this was because Fonterra's margins were compressed by high commodity prices, which limited its ability to raise prices at the world's supermarkets and meant lower profits.
But the situation next year still had ''lots of moving parts'' and much depended on product mix and other market factors.
BNZ economist Doug Steel said the most important message to be taken from Fonterra's announcement was the degree of confidence the company had in markets for the next six months or so.
The $7 milk price was slightly stronger than he had predicted.
The milk price also topped the expectations of Westpac economists, who said the announcement and the forecast bounce back in local milk production mean the new season was shaping up as a bumper one for New Zealand dairying.
- © Fairfax NZ News
Do you agree with Fonterra's decision to hold its forecasted payout at $8.30 a kg of milksolids and slash its predicted dividend from 32c a share to 10c?Related story: 'Abnormal' situation hits Fonterra forecasts