27 Mar 2013

Fonterra lifts payout forecast but drought still bites

6:58 pm on 27 March 2013

Strong earnings from Fonterra look set to help some drought-stricken farmers but the benefits will be uneven. Nor will they cancel out the negative impact of the big dry on New Zealand as a whole.

Fonterra lifted its half year profit by a third and boosted its forecast payout to its farmers, in an announcement on Wednesday.

The dairy co-operative - New Zealand's largest company - made $459 million in the six months to the end of January, an increase of 33% compared with the same period a year earlier.

Fonterra says the stronger result is due to a better performance in New Zealand and higher sales in the fast-growing regions of Asia and South America.

The recovery in global dairy prices has also prompted Fonterra to lift its forecast cash payout to farmers to $6.12 - comprising $5.80 per kilogram of milk solids, up from $5.50, and a dividend of 32 cents per share.

The previous forecast payout was between $5.90 and $6.

Global recovery - chair

Fonterra chairman John Wilson says the new forecast reflects a recovery in global dairy commodity prices over the past two months.

He says the half-year result means Fonterra can increase the advance rate paid to farmers for their milk.

"For the average farmer it will be approximately $100,000, which they are receiving two to three to four months earlier in some cases," Mr Wilson told Checkpoint. "It will certainly assist their cash flows.

"But many of our farmers are under a lot of pressure right now because they're having to buy so much feed across the North Island and some of the South Island.

Mr Wilson also warns the drought will cut into Fonterra's earnings for the second part of the year and cancel out some of the early gains.

The company says because drought conditions have been more severe and have lasted longer than predicted, it has pared back its expectations of total milk volumes for the current season to be in line with last season. The season finishes in May.

Westpac economist Nathan Penny says the increased payout will reduce the impact of the drought on the economy, which the bank previously estimated at 0.6% of gross domestic product, but won't eliminate the negative effect.