With global dairy prices staring down the barrel of a third consecutive season of below break-even payouts, the cheap milk means Fonterra's branded products can be produced with hugely increased profit margins; in part used to boost farmers' dividends by 60%.
While Fonterra this week raised its 2016-17 season forecast to $5.75-$5.85, before retentions, it cautioned global milk prices were still ``unrealistically low'' and volatility continued.
In announcing the predicted result yesterday, Fonterra's chairman John Wilson and chief executive Theo Spierings acknowledged the plight of its 10,500 co-op farmers.
``The 2015-16 season has been incredibly difficult for farmers, their families and rural communities, with global dairy prices at unsustainable levels,'' Mr Wilson said.
``We have done what we can to support our farmers with the co-operative support loan, and early payment of dividends,'' he said in a statement yesterday.
Mr Spierings said the promise for its farmers was the co-op would make the most of their milk.
``We're keeping that promise.
``We have cut our operating expenses, increased our free cash-flow, reduced our working capital days, driven debt down, and reduced our capex [capital expenditure] and our gearing,'' Mr Spierings said in a statement.
Mr Spierings said the ``heart'' of Fonterra's strategy was ``more volumes of milk solid at higher value'', witnessed by the ``real strength'' in Fonterra's ingredients business this year.
``In consumer and foodservice, we converted an additional 380million litres of liquid milk equivalents into higher returning products, bringing our total volumes in this business up from 4.5billion liquid milk equivalents to 4.9billion.
``Increasing our consumer and foodservice volumes, and especially our foodservice growth, meant we increased our normalised earnings before interest and tax (ebit) in this business by 42% to $580million,'' Mr Spierings said.
Fonterra Shareholders Council chairman Duncan Coull said the high $580million ebit meant farmers got 60% on their earnings per share, which was a ``positive result in an otherwise challenging environment''.
Farmers could take ``some comfort'' in this week's 50c increase to the forecast payout.
``The lift in the milk price, particularly the increase in the advance rate to $3.60, will provide some relief to our farmers and along with signs that our co-op's strategy is delivering strong returns, will enable them to move forward with greater confidence,'' Mr Coull said.
Chairman Mr Wilson said during the past three years Fonterra had worked hard to align its structure to its strategy and focus on achieving more value for the volumes of milk produced by its farmers.
``The higher forecast earnings per share range reflects the performance improvements the business will continue making,'' he said.
``It is still early in the season, and we expect continuing volatility as reflected in price improvements in recent global dairy trade auctions.
``Current global milk prices remain at unrealistically low levels, but as the signs in the market improve, we are very strongly positioned to build on a good result in the year to come,'' Mr Wilson said.