Fonterra news good for NZ, says bank

Fonterra chairman Henry van der Heyden. Photo / Kenny Rodger

Dairy giant Fonterra sticking with its forecast is good news not only for farmers but for the country, says BNZ economist Doug Steel.

Retail sales numbers last week showed the biggest annual price declines were in store types of appliances, department, furniture and floor coverings, Steel said.

"Part of the reason for those prices going down is because the currency's quite strong, and the currency's quite strong because the world is buying our products at high prices."

The farmer co-operative, which processes about 92 per cent of the country's milk, yesterday re-affirmed its forecast payout before retentions for 2010/11 of $6.90-$7.10 a kilogram of milksolids.

A $7.10 payout based on stable production levels could be worth about $9.1 billion.

Chairman Sir Henry van der Heyden said although international prices had declined in recent months there were a number of factors signalling a potential improvement later in the year.

"While there is still some uncertainty in global markets, if current commodity pricing and foreign exchange rates were at current levels for the rest of the season, then we estimate the 2010/11 payout would be marginally lower than our current forecast," van der Heyden said.

"However, we are holding the forecast payout of $6.90-$7.10 as we are seeing signs of potential strengthening of international prices further into the season."

Chief executive Andrew Ferrier said the season was at an early stage and the outlook finely balanced.

"On the one hand, the New Zealand dollar remained relatively strong, prices for dairy ingredients had fallen from their April peak and there is some evidence global economic growth is slowing," Ferrier said.

"On the other hand, weather in Europe, Russia, Pakistan and parts of China has affected agricultural production, although the extent of the impact on dairy is unknown," he said.

"The Russian wheat export ban has contributed to a lift in prices for grain feed, which could lend support to dairy prices."

The fundamentals for global markets continue to point to balanced supply and demand, Ferrier said.