KEY POINTS:
Fonterra yesterday released its most optimistic forecast yet about global dairy demands, which it says could deliver the New Zealand economy a significant boost over the next decade.
Unprecedented demand means global prices for milk powder (which still makes up the bulk of Fonterra's sales) have hit all-time
highs in the past few weeks.
"This is the most optimistic demand forecast that we've ever put together as an industry," said head of strategy and growth Graham Stuart.
The forecast shows demand growing at 2.7 per cent a year for the next 10 years compared with just 2 per cent over the past 10.
World dairy production would need to increase by the equivalent of New Zealand's total output every year for the next 10 years if it were to have a hope of keeping up demand, he said.
Chairman Henry van der Heyden said the "very, very positive" outlook meant Fonterra was likely to deliver a higher payout to farmers next year.
As long as the dollar remained stable the co-operative was on track to deliver a payout closer to $5/kg of milk solids next year, he said. It has forecast a payout of $4.15/kg this year.
Fonterra was getting "the highest prices for skim milk and whole milk ever traded on the global market", van der Heyden said. "Spot prices are going through the roof."
The strong kiwi dollar was masking the extent of Fonterra's success in delivering good returns to farmers.
Every 1c the New Zealand dollar rose against the US dollar knocked about 10c off the final payout, he said.
So if the dollar was still trading at US44c as it was when Fonterra was formed in 2001 the payout would be close to $6.50/kg compared with $4.15/kg.
Fonterra's hedging meant it would pay an average of 67c for its US dollars this year, he said.
Demand from 2005 to 2014 is predicted to be strongest in emerging dairy markets such as China, Southeast Asia and North Africa.
It will be static in traditional markets such as Britain and the rest of Europe.
Fonterra chief executive Andrew Ferrier said the emerging regions were aggressively developing their own industries.
So while dairy demand had soared by 20 per cent a year in China, the country had surprised the rest of the industry by growing its domestic supply just as quickly.
That presented challenges and opportunities, he said.
Fonterra already has a joint venture with San Lu dairy company in China, and is increasingly sourcing milk from suppliers in other countries.
"The message we get from our farmers is that Fonterra can't sit still."
As well as leveraging its expertise to generate more profits, diversifying the supply base made customers more comfortable relying on Fonterra as a primary supplier, Ferrier said.
"It has changed our risk profile in eyes of customers."
Stuart said Fonterra would continue to participate in the growth of emerging dairy industries worldwide.
Further investment was possible in China, South America and in new Eastern European states like Belarus, provided they stabilised politically.
He said it was a far rosier outlook than the industry faced in the 1990s, when excess milk was a problem.
Fonterra:
* New Zealand's largest company, with revenue of $13 billion.
* Accounts for 20 per cent of the country's export receipts.
* Is the world's fifth largest dairy company, accounting for one-third of global trade.
* Employs 17,400 people worldwide.