Fonterra lifts advance milk payout by 30c/kg in move to help farmer cashflows; notes pressure from strong NZ dollar

By Bernard Hickey

Fonterra has confirmed its forecast milk price for the current 2010/11 year at NZ$6.60/kg and confirmed its target dividend range at 25-35 cents a share.

New Zealand's largest exporter said it considered increasing the forecast, but decided against it because of the recent strength of the currency.

The New Zealand dollar was nearing 80 USc on Friday.

However the dairy cooperative said it would increase the advance payment to farmers to NZ$4.60/kg from NZ$4.30/kg to start from November, which would add around NZ$360 million to farmer cashflows over the year with production of around 1.2 billion kgs for the season.

Fonterra also commented that the strong New Zealand dollar was pressuring commodity returns, although US dollar commodity prices had held up better than expected and its hedging policies were helping to dampen the impact in NZ dollar terms..

The milk price forecast is up from NZ$6.10/kg paid out in 2009/10. The forecast final payout (including milk price plus dividend) for full shareholders is at NZ$6.85-95/kg, up from NZ$6.37 in 2009/10, which included a 27c/share dividend.

"When we issued the season’s opening forecast of $6.60 in late May, we indicated that then market prices could have suggested a much higher Milk Price – but that given volatile market conditions at that time we expected to see some softening in prices and we therefore forecast at a lower level," Chairman Henry van der Heyden said.

"While market prices retreated sharply over the next few months before stabilising more recently, they have held up better than initially expected. However, we’ve also seen the New Zealand dollar strengthen significantly against the US dollar, eroding the value of dairy export returns for our farmers."

Van der Heyden had suggested earlier in the year a payout of closer to NZ$8/kg than under NZ$7 now being contemplated. Each extra dollar in payout represents around an extra NZ$1.2 billion in revenues to farmers.

Farmers welcomed the Fonterra announcement.

“Farmers are acutely aware the United States dollar is now a major factor in the payout,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“I think there was some worry of a downwards revision, so news that Fonterra is standing by its current 2010-11 forecast is a huge relief. Here is the full statement below from Fonterra.

Fonterra confirmed today its forecast Milk Price for the 2010/11 season is remaining at $6.60 per kilogram of milksolids (kgMS). The forecast Distributable Profit range for the 2011 financial year is also unchanged at 40-50 cents per share, as is the target dividend range of 25-35 cents per share.

This means an average farmer who is 100 per cent shared up to milksolids production is forecast to receive a total of $6.85-$6.95 per kgMS in cash payments for 2010/11, with the balance of Distributable Profit being retained by the Co-operative.

Fonterra Chairman Sir Henry van der Heyden said dairy market prices were holding up better than initially expected, leading the Board to contemplate an increase in the forecast Milk Price.

However, the recent strength of the New Zealand dollar against the US dollar meant it was not prudent to increase the forecast at this time. While the forecast was unchanged, the Board has increased the Advance Rate schedule (the proportion of the Milk Price that is paid in advance to farmers during the season via monthly milk cheques).

The advance for the next payment in November is now $4.60 per kgMS, up from $4.30 per kgMS in the previous schedule. The higher advance rate was possible because as the season has progressed Fonterra has been able to firm up on its contract rate and prices. The lift in the advance rate will assist farmer cash flows over the coming months, Sir Henry said.

Sir Henry commented, “When we issued the season’s opening forecast of $6.60 in late May, we indicated that then market prices could have suggested a much higher Milk Price – but that given volatile market conditions at that time we expected to see some softening in prices and we therefore forecast at a lower level. While market prices retreated sharply over the next few months before stabilising more recently, they have held up better than initially expected. However, we’ve also seen the New Zealand dollar strengthen significantly against the US dollar, eroding the value of dairy export returns for our farmers.

“We should remain cautious as there’s still uncertainty and volatility in global markets and we remain vulnerable to adverse movements in dairy prices or exchange rates which could hit the Milk Price. There is always potential for both downside and upside in the forecast, so I would encourage all farmers to continue to take a conservative approach in their farm budgeting.”

Chief Executive Andrew Ferrier said in recent months global dairy prices had levelled out higher than predicted in May, from the influence of a variety of supply and demand factors. At the same time, the appreciating NZD/USD exchange rate is putting pressure on Fonterra’s export returns in New Zealand dollars.

Although Fonterra’s hedging policies were continuing to shield farmers from the full brunt of the appreciating Kiwi dollar, the higher currency poses considerable challenges for the Co-operative and many other exporters now and in the future, Mr Ferrier commented.

“We are now at the spring peak of the New Zealand milk season and this is also a busy time for Fonterra’s global sales team, as we progressively secure contracts with customers for products made from this season’s milk. As each month goes by we can become more confident about the outlook for 2010/11,” Mr Ferrier concluded.

(Updated with detail, background, charts)