Fonterra boosts pay-out to farmers in ‘big positive’ for NZ’s economy

By Paul McBeth

Nov. 9 (BusinessWire) – Fonterra Cooperative Group, the world’s largest exporter of dairy products, has boosted its forecast pay-out to farmers by 19% as a recovery in commodity prices improves the outlook for the industry, helping underpin growth in New Zealand’s economy.

The dairy cooperative increased its forecast by 95 cents to $6.05 per kilogram of milk solids amid an 88% gain in whole milk powder on the company’s online auction site over the past four months. Fonterra chief executive Andrew Ferrier said the globalDairyTrade website sales account for about 10% of Fonterra’s sales.

Rising dairy prices have helped stoke a recovery in New Zealand commodities as buyers restock depleted inventories and demand for dairy resumes after it slumped in the fall-out of the global financial crisis. ANZ Bank’s commodity price index rose for its seventh month in a row in October, and has advanced 24% from its low in February. The bank’s economists estimate the increased pay-out will inject about $1.2 billion into the economy.

“It really is a big positive for the economy – there’s no way to get around that,” said Philip Borkin, economist at ANZ National Bank. “Many more farmers are going to make profits this year, rather than losses.”

Borkin expects many farmers will use the windfall to pay down debt.

Still, the announcement bumped up the kiwi dollar 1.3% to 73.34 U.S. cents as investors’ appetite for higher-yielding, or riskier, assets was stoked by the positive news. Gains in commodity prices have been offset by the strong New Zealand currency, which has climbed more than 45% from its sub-50 U.S. cents low in March.

Ferrier said the exchange rate has been factored into the new forecast, and the company has some hedging in place, but the outlook for the currency in the medium to long term was still unclear.

Fonterra chairman Henry van der Heyden said the increase in price could encourage other countries to bring more milk on to the market.

“We saw this happen in 2007 and we saw how quickly the market can fall as a result,” he said in a statement.

The European Union has some 200,000 metric tons of butter and 300,000 metric tons of skim milk in stores.

New Zealand’s exports of milk powder, butter and cheese slumped 18% to $434 million in September from a year earlier, while casein and caseinates tumbled 36% to $42 million. Dairy products account for about 24% of New Zealand’s annual $41.6 billion worth of exports.

(BusinessWire)