Record payout will fuel economy
Fonterra forecast pumped by demand for milk powder, writes Gerald Piddock. Fonterra’s 35 cent lift in its milk price for the 2013-14 season to $8.65/kg milk solids means an extra half a billion in revenue for New Zealand.
The new forecast is a record payout from the co-operative and with the ten cent kg/MS dividend on top, meant potential cash in hand for a fully shared up Fonterra farmer-shareholder of $8.75 kg/MS.
Fonterra is required to consider its farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act.
Nationally, the payout increase meant an extra $500 million for the economy and was good for farmers and for New Zealand, Fonterra chief financial officer Lukas Paravicini said.
The lift in payout was a result of the continuing demand from China for milk powder.
‘‘In the last few months it’s still China driving the milk powder and it’s whole milk powder which makes up 70 per cent of our milk price, which drives that high price,’’ Paravicini said.
The board was maintaining its position by approving a milk price that was 70 cents per kg MS below the farmgate milk price that had been calculated in accordance with the milk price manual.
This was due to the large gap in prices between Fonterra’s two production streams – milk powders and cheese and casein.
Paravicini said he could not speculate if this would continue for the rest of the season.
‘‘There’s still five months to go and I can’t tell you if it’s going up or down and whether we are going to keep the 70 cents or not.’’
The reason for the difference was not because the manual was wrong but because Fonterra’s asset footprint did not match the manual’s theoretical footprint, he said.
Fonterra was also looking at ways of leveraging the milk price volatility and the co-operative would announce how it planned to capture that volatility when it announces its interim result on March 26. ‘‘We are far from sitting here and hoping it will go away. We are looking at how we evolve our strategy to make the best out of it and reduce the exposure of the volatility and eventually turn it into a positive.’’ The payout surprised economists. ASB rural economist Nathan Penny said Fonterra continued to surprise and this latest lift would be well received by farmers.
Extremely strong demand,
Fonterra’s new forecast is for a record payout. particularly from China, has underpinned prices and this country’s demand for dairy had become insatiable.
Production within New Zealand was strong and the bank had factored in a 10 per cent lift in production from last season.
Westpac senior economist Anne Boniface said they maintained their view that increasing global milk production, particularly in the Northern Hemisphere, would weigh on dairy prices from mid-2014.
‘‘Consequently our forecast is for the milk price to fall next season to $7.10/kg MS.’’
The payout along with what is expected to be new record highs in production, would provide a big boost to incomes in the rural sector, and would be a key pillar of stronger growth in the New Zealand economy in 2014.