Fonterra bolsters payment forecast in fillip for farmers, economy; kiwi climbs

Tuesday 22nd September 2009

Fonterra Cooperative Group, the world’s largest exporter of dairy products, raised its forecast 2010 milk payment, pumping some $750 million into the New Zealand economy.

The kiwi dollar extended its gains. The cooperative raised its expected milk price payment by 60 cents to $4.60, while trimming its value return payment, or distributable profit, by 5 cents to 50 cents per kilogram of milk solids. The net increase is 55 cents to a higher-than-expected $5.10.

Prices have surged 55% in Fonterra’s last two monthly online milk powder auctions, after they tumbled through late last year and early 2009. Higher payments may bolster the prospects for Fonterra’s plan to allow farmers to hold shares up to 120% of production, allowing the cooperative to raise equity while eventually exiting the redemption risk it faces under its current share plan.

At $5.10, “we’re not experiencing the birth of a new dairy boom, but it will be very welcome for farmers,” said Westpac agribusiness economist Doug Steel. “The global economy’s showing signs of renewed life, and Fonterra’s obviously confident prices will hold, or even go higher.”

Steel said the infusion into the New Zealand economy amounts to about 0.4% of gross domestic product, which will help the nation recover from its worst recession in 30 years. “It’s not to be sneezed at,” he said.

Government figures tomorrow are expected to show the economy shrank 0.1% in the second quarter, after a 1% slump in the first three months of the year. Reserve Bank Governor Alan Bollard, who has kept the official cash rate at a record low 2.5%, predicts the economy has climbed out of recession in the third quarter.

The kiwi dollar climbed to 71.64 US cents from 70.78 cents immediately before Fonterra’s release. The currency had already spiked up after figures showed the current account deficit shrank more than expected.

“What we’re seeing in the international market is the firming of a trend, with a more positive sentiment and stronger demand, producing better pricing across the board,” said chief executive Andrew Ferrier. “Whole milk powder prices have been leading the way, with the prices for other dairy commodities now all moving in the right direction.”

Ferrier said the improved forecast does come with a rider. “We remain in a period of extreme price volatility, which makes forecasting challenging, to say the least.”

The increase in the milk price reflects a pick-up in whole milk powder prices while the decline in the expected distributable profit reflects weaker prices for cheese and casein products.

Chairman Henry van der Heyden said the resilient New Zealand dollar, which is holding above 70 US cents, has been “fully factored” into the forecast payment.Fonterra is due to post its annual results tomorrow.

Businesswire.co.nz

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