10 Nov 2009

Fonterra forecast 'billion dollar boost' to economy

6:14 am on 10 November 2009

The increased forecast payout to dairy farmers will boost the economy by $1.2 billion, Fonterra estimates.

The co-operative is lifting its forecast payout to $6.05 per kilogram of milk solids, up from the September forecast of $5.10.

The New Zealand dollar rose by more than 1 cent after the announcement, and shortly after 5pm was trading at 73.66 US cents.

In the statement, Fonterra chairman Sir Henry Van Der Heyden said the increase was due to improvement in commodity milk powder prices.

He cautioned there is much volatility still in the market and a risk that rising prices could bring on more milk output from other countries.

Fonterra chief executive Andrew Ferrier told Morning Report the demand for dairy products has been rekindled since it fell off last year, as indicated by four consecutive price rises on the global market.

Mr Ferrier says there is a threat that other countries will now want to enter the dairy market, though there's a long lag time before supply reacts to higher prices.

Lincoln University agribusiness professor Keith Woodford says the rise equates to an extra $100,000 for the average dairy farmer.

Much of that will be needed to reduce debt, so the benefit will not flow through to the wider community for some time, he says.

Professor Keith Woodford describes the rise as "spectacular", but says international markets remain incredibly volatile.

The New Zealand dollar rose on the news from 72.5 US cents to 73.4 US cents.

Excellent news, say farmers

Fonterra Shareholders Council chair Blue Read says the increased payout forecast means the majority of farmers will return to profit, and will prevent some having to leave their business.

Federated Farmers says the rise will mean many dairy farmers should be able to turn a loss for the year into a small profit.

The organisation's dairy chairman Lachlan McKenzie says the figure is 25 cents higher than he had predicted.

"This is excellent news, but it just goes to show how volatile the world situation isand how volatile particularly milk prices are," he says.

He expects the boost will save some farmers from having to re-finance or sell assets, and says most farmers are likely to repay debt, rather than spending on luxury items.

The payout is made up of a forecast milk price of $5.70 (up from $4.60) and a distributable profit or value return of 35 cents (down from 50 cents).

The company says the 15 cent fall in the distributable profit is due to products like cheese and casein lagging behind powder prices.