Fonterra milk price forecast a record

Fonterra has hiked its forecast farm-gate milk price to a record $8.65 per kg of milk solids, with the 35c increase equating to an increase in dairy incomes of about $600 million.

It means a forecast cash payout of farmers of $8.75 for the 2013-14 season, with the previously announced estimated dividend of 10c a share.

The higher forecast reflected continuing strong global demand for milk powders, Fonterra chairman John Wilson said.

The announcement was welcomed by Federated Farmers dairy chairman Willy Leferink, who said the forecast, if it stuck, represented ''good times'' for all New Zealanders.

In 2010, the New Zealand Institute of Economic Research said a $1kg rise in Fonterra's payout made every New Zealander nearly $300 better off.

''Given this latest ... uplift, every New Zealander could be $100 better off as a result of what we do,'' he said.

However, Mr Leferink also sounded a note of caution, advising car dealers or rural agents not to rub their hands ''just yet''.

In the three months to January, the Real Estate Institute of New Zealand's dairy farm price index fell by 2.9%.

In a key area such as Canterbury, the REINZ noted the dairy farm market had plateaued and demand for very good properties was being driven mainly by local buyers.

''It tells me there's a realisation that forecasts are just that and in the case of the North Island, a great 2013-14 is needed to make up for a lousy 2012-13 drought-affected season.

''The climb of dairy commodities behind this revised forecast can be traced to less than optimal conditions facing our competitors abroad.

''That's why I am confident farmers are on conservative budgets and, if it does stick, then they will prioritise debt retirement and productive investment, especially on environmental works,'' he said.

ASB rural economist Nathan Penny said the lift in dairy incomes would be a key engine of growth over 2014, along with the Christchurch rebuild and the accompanying general broadening in growth.

Combined with an expected 10% increase in production compared with last season, dairy incomes were set for a $5 billion boost from the drought-hit 2013 season.

While there were reports emerging of dry patches, particularly in the Waikato, he expected the boost to further encourage farmers to keep production high for as long as possible.

Mr Penny expected the high dairy prices to spill over into next season.

Forsyth Barr broker Andrew Rooney said the forecast lift was good news for farmers, albeit the actual forecast price remained 70c lower than the theoretical price of $9.35.

In December, Fonterra unexpectedly left its forecast milk price unchanged at $8.30 and slashed its dividend by 22c to 10c, due to the disparity between very high milk powder prices, and those for cheese and casein.

That forecast was 70c per kg of milk solids below the farm-gate milk price that had been calculated in accordance with the milk price manual, and Fonterra was maintaining that position with this week's forecast.

The board had the discretion to pay a lower farm-gate milk price than specified under the manual, if it was in the best interests of the co-operative.

Looking ahead, Westpac maintained its view that increasing global milk production, particularly in the northern hemisphere, would weigh on dairy prices from mid-2014.

The bank's forecast was for the milk price to fall next season to $7.10, senior economist Anne Boniface said.

There was a noticeable market reaction to the announcement yesterday, with the NZD/USD rising 0.3c and two-year swap rates up one basis point, she said.

Fonterra's board also approved an increase in the advance rate schedule of monthly payments to farmer shareholders.


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