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Fonterra's milk payout for next season could soar over $8 per kilogram/milk solids, meaning a potential $2.5 billion injection for the economy.
Fonterra today announced a forecast payout of $6.60 kg/MS for the 2010/11 season and says it could end up "well over" $8 which would be a record price for their 10,500 farmer-shareholders.
The opening price is a 50 cent increase on the forecast price for the current season (2009/10) and TVNZ Business Editor Corin Dann says it represents a significant boost to the economy.
"This opening price will mean an initial payout of between $400-500 million. Lifting the forecast by 50 cents gives dairy farmers a strong degree of certainty for the next 12 months about what they will be earning."
Fonterra Chairman Sir Henry van der Heyden says if international dairy prices and foreign exchange rates hold to current levels for most of the coming year, then it is possible that the 2010/11 payout could be well over $8.00.
Dann points out that Fonterra habitually starts from a very cautious price point and this forecast price will be revised throughout the season.
Market analyst Peter McIntyre from Craigs Investment Partners says a price over $8 would be "massive" news for New Zealand and predicts a $2.5 billion boost to the economy.
"It's going to provide a huge multiplier effect right throughout our economy when we need it."
McIntyre says this increased forecast and booming soft commodity prices could be a defining factor in the Reserve Bank raising the Official Cash Rate in June.
"When the rest of the world seems to be in disarray, those commodity prices are holding up. Ultimately (this) will be of huge bnefit to New Zealand" says McIntyre.
Caution urged
However, Fonterra is still sounding a warning about volatility in their market.
Their overall opening forecast is $6.90-$7.10, which includes the milk payout price and a forecast Distributable Profit of 30-50 cents per share and van der Heyden says this is "appropriate" for the market conditions.
"We are seeing big swings in foreign currencies and turmoil in some economies. These factors could have a big impact on demand for dairy products and the prices we ultimately realise.
"If prices hold up throughout next season, we could be looking at a significant improvement during the course of the year. But at this stage, in the current volatile environment, it would not be sensible to count on this."
Fonterra CEO Andrew Ferrier says strong growth in dairy consumption and demand from China, the rest of Asia, the Middle East and North Africa has been a major factor on the forecast.
"Meanwhile, global supply remains constrained, with production down because of adverse weather in Europe and Australia, while tight credit conditions are constraining dairy growth in the United States," he says.
Ditributions and retentions
Van der Heyden says the board is forecasting a distributable profit for 2010/11 of 30-50 cents a share, although an updated forecast will follow the group's annual budgeting process in late July.
He says that the board currently intends to make retentions from this, in line with Fonterra's dividend policy which is to retain 25-35% in the cooperative.
The cooperative has also set the Fair Value Share (FVS) price for 2010/11 at $4.52 per share and confirmed that the board has reviewed its forecast for the current 2009/2010 season and is on track to achieve their forecast of $6.10 per kg/MS.
