Falling dollar too late for farmers

Fonterra CEO Andrew Ferrier (left) and chairman Henry van der Heyden says the high dollar wiped out gains from increased production. Picture / Paul Estcourt

The faltering dollar is unlikely to fall fast enough to boost farmer payouts this season, says Fonterra chief executive Andrew Ferrier.

The high dollar knocked the top off what was otherwise an improved half-year result to November 30 last year, Fonterra reported yesterday.

Ferrier said if the dollar continued to fall over the coming months it would benefit farmers.

But with the Fonterra's currency needs hedged at an average of of 67USc for the season, it would have to drop dramatically to have a significant impact on the bottom line before the end of the financial year on May 30.

The company said good summer weather meant milk production was up on the same period in 2004.

That helped improve sales volumes and, with global dairy prices remaining strong, operating revenue was up $300 million to $6 billion for the period.

But when US dollar earnings were converted back into kiwi dollars, final returns to farmers were down on the same period the previous year.

The amount available for payout was $2.2 billion for the six months, down from $2.4 billion in 2004.

The previously forecast farmer payout of $4 per kilogram of milk solids was unchanged.

Ferrier said the result was "pretty much as expected. Essentially. it is quite a stable environment."

Fonterra buys its US currency 15 months in advance to ensure its farmer payouts do not fluctuate wildly with the exchange rate.

For the first half of this season, Fonterra has been converting its currency at a rate of 64USc.

If the dollar continues to fall, then 67USc (the anticipated average for the full year) could well be the worst rate Fonterra has to deal with.

Ferrier said a sizeable percentage of the dairy company's forward buying was done with options.

That means that if the dollar goes up to 75USc, farmers will be covered, but if the dollar falls to 60USc in the next few months, then Fonterra can ignore its options and begin buying at the market rate.

Ferrier said hedging had really paid off for farmers over the past few years. It had brought in significant gains as the dollar moved up but was flexible enough to let them benefit quickly when the dollar began to fall.

Fonterra chairman Henry van der Heyden said 2005 had always been expected to be a tough year.

He said while commodity prices had remained firm the company did not anticipate any further increase in price.

This was also the second consecutive year in which cold weather had slowed production at the start of the season. However, conditions had improved compared with the first six months of the 2004 season.

Van der Heyden said production was almost 4 per cent up on the same period the previous year.

The ability to source products from farmers in other parts of the world had also helped cover the early deficit in local production and contributed to the rise in sales volumes.

Ferrier said the Fonterra Ingredients business and the consumer goods business, Fonterra Brands, had recorded revenue increases.

Like all value-added businesses Fonterra Brands faced tough operating conditions while prices for raw milk powder were high.

Traditionally, Fonterra had struggled to offset the higher costs by lifting prices.

But the focus on fewer, stronger brands allowed the business to lead prices up without undermining sales volumes, he said.

If commodity prices did fall then Fonterra Brands would be well placed to cash in. But the global dairy market still appeared to be stable.

"That doesn't mean you won't get some softening but there is nothing out there indicating there is any material change to the fundamentals in the dairy market."