The dramatic recovery in world dairy prices is expected to be reflected in a much healthier interim financial result to be announced by Fonterra this morning.
Prices on Fonterra's internet-based globalDairyTrade doubled from August to December but have stabilised at the three auctions this year, indicating a strong recovery from the previous corresponding period, when prices plummeted.
Another sign the dairy sector's fortunes have turned around is Fonterra's improved forecast payout to farmers, which was $4.55 per kilogram of milk solids pre-season, but has now reached $6.05 a kilo.
Last month, Fonterra announced an increase in the distributable-profit forecast range for this season, from 35c to 45c a share to between 40c and 50c a share.
The milk price, forecast at $5.70 a kilo, and the distributable profit, make up the payout to farmers.
Chief executive Andrew Ferrier said despite the increase in the forecast distributable profit, Fonterra has maintained its target profit, or dividend, payment at between 20c and 30c a share, the balance to be retained earnings.
But cancelling some of those gains will be the effect of drought in Northland, where milk flows are understood to have been reduced by 30%.
In announcing the revised distributable-profit forecast, Mr Ferrier indicated aspects of the business which had shown a dramatic recovery.
He said gains from divestments, improved joint-venture returns, and lower funding costs through improved working capital had contributed to the higher dividend pool.
Federated Farmers dairy section chairman Lachlan McKenzie said recent changes to the way the milk price was calculated would provide shareholders with a benchmark for comparing performance between years.
The milk price was now calculated by a formula using a basket of commodity prices traded on globalDairyTrade minus operating costs.
Previously, it was calculated by putting all the income and expenses into one pot and paying farmers what was left over.
Mr McKenzie said the new system was much more transparent.
In the six months to January 31, 2009, Fonterra reported revenue of $8 billion, of which $4.6 billion was available as payout to farmers.
Mr McKenzie said the period under review tended to carry a disproportionate level of inventory and costs for Fonterra, and last year those figures were influenced by changes to the balance date which meant two extra months of production were included.
Inventory was valued at $5.1 billion which helped boost net interest-bearing debt to $7.4 billion.
