KEY POINTS:
Fonterra says it will boost its payout to farmers on the back of soaring global dairy prices, putting an additional $250 million into the rural economy.
And it says next season looks even better for shareholders, provided the dollar holds steady.
The dairy co-operative said yesterday that its 11,000 shareholders would get $4.35 for each kilogram of milk solids they supply, up from the $4.15 predicted in March and from the $4.05 predicted at the start of the year.
The rise means an extra $20,000 in the pocket for the average shareholder farmer supplying around 100 tonnes of milk solids a season.
Fonterra attributed the lift to "unprecedented' global dairy prices, which last month rose 11.8 per cent, up 58 per cent from the year before.
Tight global supply and relatively strong demand - particularly in Asia, the Middle East and South America - had fuelled the price rises, enabling the latest increase which would be paid out in July and August, said Henry van der Heyden, Fonterra's chairman.
"Over the last six weeks or so we've seen a huge lift - by about 30 per cent - in powder prices."
Although "one-off factors" such as the Australian drought and US supply constraints had driven the result, van der Heyden expected the good prices to continue into the next season.
He said the forecast for 2007-08 would be announced on May 23 and that early indications were it would be closer to $5 than $4.
"We're now confident that if current exchange rates hold, next season's payout will have a $5 in front of it."
However, van der Heyden expected the company might be exposed to currency fluctuations in the coming season, and would not reveal the degree of hedging it had in place.
The revised forecast is made up of a milk price component of $3.84 - up 14c - and a value add component of 51c, which he said had risen 6c due to "ongoing cost efficiencies and higher sales in the value-add businesses".
However, the high commodity prices were expected to take their toll on that value-added business.
"Next year [the high commodity prices] are likely to impact on the whole 12 months and this will mean our value add component of payout [essentially profit] will be down in 2007-08."
Fonterra supplier John Sexton, of Auckland Federated Farmers, said the increase was a "welcome announcement", given forecasts that more than half of dairy farmers would be running at a cash loss this year due to increases in rates, interest rates, and fuel costs.
"Even at $4.35 we're still about the same as we were five years ago on average. We've had to somehow survive absorbing some pretty considerable cost increases in that time."
Sexton said a lack of rain in February and March plus a "considerable rise" in the costs of nitrogen fertiliser had meant his farm had been less productive than usual.
"The increase will certainly be very welcome, allowing people to catch up on a few things that would otherwise be postponed."
Shamubeel Eaqub, economist at Goldman Sachs JBWere, which earlier predicted the payout could hit $4.35, agreed dairy farmers would have been "very hard pressed" if the payout had remained at $4.05, citing increases in the price of petrol and land that had driven farm expenses up 4.4 per cent.
However, he said Fonterra had failed to fully benefit from the stellar price rises as a lot of commodity was presold, but he expected favourable developments next season.
"We think the payout next year is going to be about $5.50. Given where commodity prices are going and our expectation of falling exchange rates over the next year, we think that will be a feasible target."
But he stressed that not all parts of the rural sectors were doing as well, with the high currency eroding farm incomes, particularly those of sheep farmers.
He said dairy's strength was due to short-term factors like the drought in Australia and low production growth in New Zealand.
Milk Money
* Fonterra's payout to farmers will be $4.35 per kg of milk solids for this season, up 20c from its last forecast.
* This takes Fonterra's total payout to $5.37 billion.
* The result, driven by an 11.8 per cent rise in dairy commodity prices in April, will help offset rising farming expenses.
