KEY POINTS:
Fonterra has boosted this season's milk payout forecast for its 11,600 farmers to a new record of $6.40, up 87 cents.
The lift is from its May forecast of $5.53/kg, and includes a basic milk price of $6.20, with an added value return of only 20c/kg.
Fonterra chairman, Henry van der Heyden, said the record forecast was on the back of the continued rise of international commodity prices, particularly recent increases in butter, cheese and continuing firm prices for milkpowders.
World cheese and butter prices have increased more than 50 per cent over the past few months and milkpowder prices are holding at levels more than double historical long-term prices.
These price levels were factored into the payout revision.
A $6.40 payout would be equivalent to about $689,000 for the average Fonterra farmer, with those farmers with large herds on several farms receiving multi-million dollar payouts.
"The strength of the market is such that we have seen the EU reduce subsidies on dairy products to zero for the first time since their introduction more than 30 years ago," Mr van der Heyden said in a statement.
The export prices achieved since the start of the current season at the end of May had more than offset the continued strength in the New Zealand dollar, was last week trading in the US80c US range.
"We have seen huge volatility in the New Zealand dollar which has risen to historic highs and then plummeted recently," he said.
Fonterra was using a US71c spot exchange rate for the NZ dollar in its forecasts, but "we have to acknowledge that rates have not settled and could go either way," Mr van der Heyden said.
"If the lower dollar is sustained over time, we could see more upside in payout, but this is not the time to be gambling on that."
Fonterra normally takes a conservative approach to its payout forecasts.
In July, Mr van der Heyden said that the huge cooperative was sticking at that time with its forecast of $5.53/kg for the 2007-2008 payout, despite a Westpac Bank economist saying that with an average cross rate of US77c for the season, a payout of $6.60 was possible.
If export dairy prices remain high and the NZ dollar exchange rate does not climb too much a payout of $6.60/kg is well within Fonterra's reach - which would mean an "average" payout of $711,000.
Today the NZ dollar was trading around US71.36c, having briefly dropped below US66.50c last week.
Fonterra has previously estimated that each US1c variation in the exchange rate when it signed sales contracts can vary farmgate payouts by NZ10c/kg.
Last season's payout of $4.46/kg of milksolids was equivalent to a total injection of $5.6 billion into regional economies, and when it was averaged up to $4.50/kg by including top-up payments for special milks, produced an average payment to farmers of $482,758.
Fonterra chief executive Andrew Ferrier today said the co-operative was on track with its sales targets for the year and was "happy" with its position across all of its product groups.
"Powder prices are holding as there has been a consistently tight supply situation," he said.
"There are some supply gaps out there and with production picking up in our region, we're ready to fill those gaps."
But Mr Ferrier said Fonterra - which controls nearly 40 per cent of the international dairy trade - could not rule out customer sensitivity to prices.
"We are seeing price rises across most food groups at the moment, and the signals are that it will continue for a while," he said.
Fonterra would continue to focus on holding costs and maximising revenues to ensure that the benefits of the strong market and recent currency declines would flow through to farmers.
Fonterra's board will lift its scheduled advance payments to farmers. The advance payment for October will increase by 60c from $3.60 to $4.20/kg - more than farmers have received for the entire season in some recent years.
Mr Ferrier said that because of the volatility of the markets, Fonterra will no longer advise farmers when its forecast moves up or down by 10c/kg.
"Under the current volatile market conditions the Board has decided that it would be more appropriate to use a 30c movement as the trigger for a forecast revision announcement," he said.
- NZPA
