KEY POINTS:
Less than a month after hosing down expectations of a big payout lift this season due to the dollar's strength, Fonterra has unveiled an improved forecast that will inject more than $120 million into the rural economy.
The forecast jump - from $4.05/kg to $4.15/kg of milk solids - comes despite the renewed strength in the New Zealand dollar and follows a sustained period of strong global dairy prices.
Skim milk powder prices, for example, were at an all-time high of US$3125 ($4465) a tonne yesterday, said information provider Agridata. Prices have been pushed up by factors such as the Australian drought and production shortages in the US.
Based on figures from last season, each 1c/kg lift is worth more than $12 million nationally or more than $1000 a farmer. That means 10c/kg is worth more than $120 million nationally or more than $10,000 a farmer on average.
Delighted Waikato dairy farmer Peter Buckley, president of the local branch of Federated Farmers, said the rise was great news.
"Farmers out there will be really looking forward to some extra money."
He had produced 4 tonnes more this season than the same time last year, so the improved payout would be made on increased production. He expected a record year overall for Waikato dairy farmers.
Fonterra chairman Henry van der Heyden said the higher commodity prices this year were more than compensating for the high dollar, and the gains could be passed on to farmers.
"Up until now, gains in commodity prices were largely being nullified by the rising dollar."
Tight supply conditions globally were supporting record prices and "we are on track to match the strong sales volumes of the first half with an equally good performance in the second", van der Heyden said.
The rise in forecast payout was based on confidence that contracts would go through at higher prices in the last quarter.
"It's not until you get sales contracts locked down at these higher prices that you can be confident of better returns," van der Heyden said.
The expected extra 10c/kg is related purely to returns from commodities, rather than returns from value-added products such as branded consumer goods.
Van der Heyden said the longer term outlook for prices was positive so there could be a higher forecast payout for next season under prevailing exchange rates.
However, a "continually climbing New Zealand dollar could eat away some or all of our market gains".
Fonterra's announcement comes less than a month after it warned against any "reckless" optimism about a big increase in payout due to higher commodity prices.
The comment followed a suggestion from financial services company Goldman Sachs JB Were that sustained strong prices could push the final payout as high as $4.35/kg. Data provider Agri-fax had said then that $4.15/kg to $4.20/kg was possible.
But the managing director of Fonterra global trade John Shaskey said last month the co-op was "running fast to stand still" at $4.05/kg because of the strength of the dollar.
Deutsche Bank chief economist Darren Gibbs said the increased payout was "a pleasant surprise to farmers who were watching the currency going up and wondering if their payout was going to go down".
"The currency has been moving up over the past little while, but as is usually the case it's telling you something about both the level of activity in the economy and what's been happening to commodity prices."
The New Zealand dollar closed above US70c last night.
Milk money
* Fonterra has boosted its payout forecast this season from $4.05/kg of milk solids to $4.15/kg.
* That extra 10c/kg is worth more than $10,000 to the average farmer and $120 million extra to the rural economy.
* The rise follows a sustained period of high commodity prices.
* Fonterra also believes the longer term outlook for commodity prices means there could be even more for dairy farmers next year.
