Fonterra forecast worth an extra $500m to NZ

Fonterra's 35 cent lift in its milk price for the 2013-14 season to $8.65/kg milk solids means an extra half a billion in revenue for New Zealand.

The new forecast is a record payout from the co-operative and with the 10 cent kg/MS dividend on top, meant potential cash in hand for a fully shared up Fonterra farmer-shareholder of $8.75 kg/MS.

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

Nationally, the payout increase meant an extra $500 million for the economy and was good for farmers and for New Zealand, Fonterra chief financial officer Lukas Paravicini said.

The lift in payout was a result of the continuing demand from China for milk powder.

''In the last few months it's still China driving the milk powder and it's whole milk powder which makes up 70 per cent of our milk price, which drives that high price,'' Paravicini  said.

The board was maintaining its position by approving a milk price that was 70 cents per kg MS below the farmgate milk price that had been calculated in accordance with the milk price manual.

This was due to the large gap in prices between Fonterra's two production streams - milk powders and  cheese and casein.

Paravicini  said he could not speculate if this would continue for the rest of the season.

''There's still five months to go and I can't tell you if it's going up or down and whether we are going to keep the 70 cents or not.''

The reason for the difference was not because the manual was wrong but because Fonterra's asset footprint did not match the manual's theoretical footprint, he said.

Fonterra was also looking at ways of leveraging the milk price volatility and the co-op would announce how it planned to capture that volatility when it announces its half year result on March 26.

''We are far from sitting here and hoping it will go away. We are looking at how we evolve our strategy to make the best out of it and reduce the exposure of the volatility and eventually turn it into a positive.''

The payout surprised economists.

ASB rural economist Nathan Penny said Fonterra continued to surprise and this latest lift would be well received by farmers.

Extremely strong demand, particularly from China, has underpinned prices and this country's demand for dairy had become insatiable.
Production within New Zealand was strong and the bank had factored in a 10 per cent lift in production from last season.

''While there are reports emerging of dry patches, particularly in the Waikato, we expect this boost to the milk price will further encourage farmers to keep production high for as long as possible.''

Westpac senior economist Anne Boniface said they maintained their view that increasing global milk production, particularly in the Northern Hemisphere, would weigh on dairy prices from mid-2014.

''Consequently our forecast is for the milk price to fall next season to $7.10/kg MS.''

The payout along with what is expected to be new record highs in production, would provide a big boost to incomes in the rural sector, and would be a key pillar of stronger growth in the New Zealand economy in 2014.

For the average Fonterra shareholder nationwide with a herd of 402 cows milking 346kg milk solids per cow, it was an additional $48,682 in income, according to DairyNZ data for the 2012-13 season.

Boniface said there was a noticeable market reaction to Fonterra's announcement. The NZD/USD rose 0.3 cents on the news, and
two-year swap rates were up 1 basis point.

Fonterra also increased its advance rate schedule of monthly payments to farmer shareholders.

Payments from March through to June will be 25 cents per kg MS higher than the previously published schedule.

Federated Farmers dairy chair man Willy Leferink said that increase would be welcomed by farmers, particularly those in parts of New Zealand that were starting to get dry.

''Some parts of the country are getting a bit under stress at the moment, and it will be a huge help to find alternative sources [of feed] to keep the cows going.''

He said the lift in the forecast was fantastic news.

''Milk is a super food, it's in high demand and we just can't produce enough of it and so the price goes up.''

If it remained, it represented 'good times' for all New Zealanders.

''In 2010, the NZIER said a $1 kg/MS rise in Fonterra's payout makes every New Zealander nearly $300 better off.  Given this latest 35 cent kg/MS uplift, every New Zealander could be $100 better off as a result of what we do.''

Leferink said farmers needed to remain prudent with their spending.

''Yet we seriously caution farmers from counting their milk solids when sitting at the table, there's plenty of time for counting when the season's done.

''If you need to spend, spend it wisely. Reduce debt and I'm pretty sure some of the spoils will go into the community.

''Communities like Morrinsville, Tahuna and Matamata will have a huge benefit out of these increases.''

He anticipated other dairy companies and co-operatives would revise their payout forecasts to near match, if not better, Fonterra.

Fairfax Media