Fonterra payout up to $4

Henry van der Heyden says shareholders will welcome the rise in the payout forecast. Picture / Greg Bowker

Fonterra has increased its forecast milk payout for this season to $4 a kilogram of milksolids.

It says the 15c improvement will come mainly from cost-cutting and productivity gains, not higher commodity prices.

"Shareholders will welcome the increase and, while some minor gains in forecast product mix and exchange rates have contributed, they need to be aware that our improved forecast is largely the result of an ongoing programme of cost controls and efficiencies being undertaken throughout the season," Fonterra chairman Henry van der Heyden said yesterday.

Fonterra's previous forecast was for $3.85/kg of milksolids, but dairy farmers have said they are not happy with "anything with a three in front of it", which would be a significant drop in income from last season's $4.59/kg of milksolids.

ASB Bank chief economist Anthony Byett said that in general, commodity prices in the dairy sector were holding up.

If New Zealand had a good season, the extra supply might reduce prices, but it was not evident yet.

The country's production was 3.5 per cent lower last year, mostly because of a wet spring.

This year, the worry is more about dry weather. ASB's latest commodities report quoted an international commentator as noting the possibility of a drought affecting New Zealand supply.

Frank Brenmuhl, chairman of Dairy Farmers of New Zealand, said there had been a softening in some commodity prices but Fonterra was neither conservative nor optimistic in its forecasting.

Dairy farmers were facing increased labour, fuel and electricity costs and a reduced per-kilogram payout. Higher energy costs might force farmers to stop irrigating, reducing production.

Fonterra has previously warned that last year's payout was at the "absolute top" of the commodity cycle. It has also said that farmers are unlikely to see a return to the halcyon days of payouts over $5 seen in Fonterra's first few years, because such high milk costs cannibalise the industry by encouraging customers to substitute other ingredients in foods.

- NZPA