Fonterra hikes dairy payout by 40c to $6.10

Fonterra has just announced it is increasing its forecast payout by 40 cents, to $6.10 per kilogram of milksolids.

From the NZ Herald

Co-op chairman Sir Henry van der Heyden said continued strength in global dairy prices, with demand growth beginning to outstrip supply, had driven the decision to increase the forecast milk price.

This increase is the first since the forecast milk price was raised by $1.10 per kilo of milksolids (kgMS) last November.

“This extra 40 cents per kgMS will be welcomed by our farmer shareholders and also confirms that 2009/10 is shaping up as the second best in terms of cash payments to Fonterra farmer shareholders,” said van der Heyden.

“However, it comes at a time when many farmers, especially those north of Taupo, are suffering from worsening drought conditions. Many of them are being forced to dry off their herds early this season, so unfortunately what they will gain in farm income through the higher milk price they may lose through lower production,” he said.

“Looking forward, we recognise that the weather has made it very difficult for many farmers going into the winter, and that farmers will need to be setting their budgets soon for next year.

He said that a “more formal” forecast would be done at the end of May.

In light of the higher milk price forecast, Fonterra has revised the advance rate schedule for milk payments, with progressive increases in payments over the next six months.

Van der Heyden said this would put more money into farmers’ pockets sooner – helping farmers with their cash flows while protecting the strength of Fonterra’s balance sheet.

The co-op has also maintained its forecast range for the 2009/10 distributable profit of 40-50 cents per share.

Fonterra’s target dividend range is also unchanged at 20-30 cents per share; this indicates 10-30 cents per share of distributable profit would be retained within the co-op.

Chief executive Andrew Ferrier said that since the last milk price forecast, dairy prices had remained relatively high and more stable than expected for several months, and had recently increased further.

“The global supply/demand balance for dairy products has shifted to a slight supply deficit. Demand from Middle East/North Africa and Asian markets continues to grow. On the supply side, global milk production has continued to slow, with production contracting in several key markets.”

He said that supply had been affected by a tough European winter, while production from Australia and North America was also down.

The drought here in New Zealand meant Fonterra production was likely to be similar to last season. A modest increase had previously been forecast for this season.

Although the net effect was good news for the milk price in the short term, Ferrier said there was still “significant volatility” in the market.

He also said that despite the higher milk price, profits remain as expected, driven primarily by further earnings improvements within the consumer brands businesses and lower overall funding costs.