Fonterra has lifted its financial performance over the first quarter, which will help farmers to at least partially offset the effects of weakness in global dairy product prices, the dairy giant says in its latest forecast.
The cooperative raised its earnings per share forecast range for the current year to 45-55 cents from an earlier forecast of 40c to 50c and said it had made inroads into its debt.
With a forecast farmgate milk price of $4.60 a kg of milksolids, the earnings upgrade will lift the total available for payout to $5.05-$5.15 per kg and would currently equate to a total forecast cash payout of $4.95-$5.00 per kg, after retentions, Fonterra said.
Fonterra's performance in the quarter ended October 31 built on the strong second half of the 2015 financial year to July 31, chairman John Wilson said.
"While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra's performance delivering increased returns," he said.
"Performance is well ahead of last year and we are hitting our targets on gross margins and operating and capital expenses," Wilson said in a statement.
Fonterra also increased the rate at which farmers are paid under its farmer support scheme 50 cents per kg, with the total amount paid up to December going from 18 cents to 25 cents.
Management would recommend an annual dividend of 35-40 cents per share.
Chief executive Theo Spierings said the scheme - which amounts to an interest free loan up until May 31, 2017 - was supporting farmers while milk prices were low.
Fonterra re-iterated that it expected a reduction in milk collections in New Zealand for the current season of at least 5% - equivalent to around 150,000 tonnes of whole milk powder.
Since August, Fonterra had reduced the amount of product it expects to offer on the GlobalDairyTrade (GDT) platform over the year by 146,000 tonnes.
In addition, an increased portion of product is being sold through bilateral customer agreements for a premium on prices achieved on the GlobalDairyTrade platform. Ingredients inventory levels for the first quarter were in line with the same period last year, it said.
Spierings said the performance in the first quarter built on the strong finish to 2015 with margins increasing across the group from 14% to 23% compared to the same period last year.
Capital expenditure of $258 million was down 37%, and operating expenses were down by 4% to $628 million.
Spierings said Fonterra was on track to reduce its debt, with the gearing ratio expected to return to the 40-45% range at the end of the current financial year from 49.7 per cent in 2014/15.
In October, ratings Standard and Poor's downgraded Fonterra's credit rating from 'A' to 'A minus', reflecting the agency's concerns about the co-operative's dairy giant's debt levels.
The downgrade reflected S&P's view that Fonterra's risk profile had weakened in the past two years, as the company's peak capital expenditure and a sizeable debt funded acquisition - the purchase of an 18.8% stake in China's Beingmate - coincided with a high level of volatility in the global dairy market.
