Fonterra lifts dairy forecast

Fonterra CEO Theo Spierings says international dairy trade growth is being led by strong demand for whole-milk and skim-milk powders. Photo / Chris Gorman

Last summer's drought is fast becoming a distant memory for dairy farmers who, according to one economist, now face the prospect of record income after Fonterra upgraded its payout forecast for 2013/14.

The co-operative dairy giant raised its forecast milk price to farmers by 50c for the 2013/14 year to $7.50 per kg of milk solids, reflecting constrained global supply and the lower New Zealand dollar.

At that level, the milk price would be just 10c short of the record high $7.60 per kg recorded for the 2010-11 season.

Together with a forecast dividend of 32c a share, farmers are now looking at a cash payout of $7.82 per kg for the current year compared with $7.90 in the very strong 2010/11 season.

If the forecast pans out, the milk price will be a $1.70 improvement on last season, and would offer the economy a big boost, economists said.

Westpac said a strong season could lift the economy by $3.4 billion, or 1.6 per cent of nominal gross domestic product, compared with the 2012/13 season.

"The lift in the milk price, combined with an expected rebound in production, represents a sizeable boost to New Zealand's national income," Westpac said.

ANZ rural economist Con Williams said the payout would equate to total farm income of over $12.1 billion - up $3.1 billion on the last season.

On a profit basis, this would potentially push the average income for owner-operators to $393,000 a farm - the highest on record, Williams said.

But he said record income levels assumed milk production and expenditure were held at levels similar to last year's.

"Overall, it's very positive for the dairy sector and for the regional economies as a whole."

Federated Farmers said the milk price was an "overdraft clearer", which meant farmers would look to pay back credit extended to them during the drought.

Fonterra chairman John Wilson said supply constraints in Europe and China during the Northern Hemisphere spring had contributed to an increase in dairy prices of 3 per cent over the past two months.

Rising milk prices are an added cost to the manufacturing, or dividend-paying, side of Fonterra. At 32c Fonterra's forecast dividend was unchanged from the previous year.

Units in the NZX-listed Fonterra Shareholder's Fund, which give investors access to Fonterra's dividend flow, closed down 19c at $7.30.

Chief executive Theo Spierings said international dairy trade growth was being led by strong demand for whole milk and skim milk powders.

"This trend, relative to prices for cheese and casein, currently would have a short-term negative influence on product mix returns during the first half of 2014," Spierings said.

"As we drive for growth in our consumer businesses, during the first half of 2014 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins."

DairyNZ said yesterday's increase in Fonterra's forecast payout translated into a further $845 million circulating in the national economy.

But the industry group said the level of farm debt servicing was about twice today what it was a decadeago.

About 20 per cent of farms had virtually no debt while another 20 per cent carried 45 per cent of the total debt, DairyNZ said.

Westpac economist Nathan Penny said that while an increased dairy payout would prove a big boost to agriculture, the sheep meat sector was struggling with low prices and low stock levels sine the drought.

However, beef farmers were benefiting from improved prices despite the drought's after-effects.