Fonterra yesterday increased the incentive for cash-starved sheep and beef farmers to switch industries by adding another 40c to its forecast price to dairy farmers, increasing its record payout to $7.30 a kg for milk solids.
The extra 40c a kg of milk solids (kg/ms) for this season would, in an average year, add another $45,000 in gross income to each of the 1200 South Canterbury, North Otago, Otago and Southland dairy farmers, pumping more than $50 million into the regional economy.
Fonterra chairman Henry van der Heyden said the final payout for the season could go higher, but he warned instability in financial markets could encourage the board to retain some of this season's earnings.
This year has been anything but normal, with the dry summer throughout the country reducing production and forcing farmers to buy extra feed to get their cows through the winter.
Production in the past three months was 80 million kg/ms below budget because of the impact of drought, Mr van der Heyden said.
Fonterra had been aiming to collect 1.25 billion kg/ms for the season, similar to last year.
Rural bankers noted before yesterday's revised dairy payout that the income gap between dairy and sheep and beef farmers had never been greater.
Many sheep farmers now face their third successive year of low lamb prices and second year of cash deficit.
Mr van der Heyden said yesterday the increased payout reflected the higher milk price component, which underpinned commodity prices.
Fonterra expected commodity prices to ease faster than they had, and he said it was ironic the drought had helped those prices stay high.
‘‘As production has dropped in New Zealand, supply gaps have opened up and prices have risen,'' he said.
The value-added component of the payout, or sales of branded products, has increased 2c a kg/ms to 22c kg ms, but margins were being squeezed by higher commodity prices.
Chief executive Andrew Ferrier said supplies of dairy products were expected to remain tight for some time, but he warned demand could ease as buyers resisted higher prices.
International prices for skim milk powder had fallen as production from the United States has increased, while whole milk powder, cheese and butter prices had risen, compensating for a stronger exchange rate.
He said he expects international prices to stabilise between where they had peaked and historic levels.