NZ farmers may not gain from dairy price windfall

Fonterra Cooperative Group's NZD0.40/kg (US$0.29/kg) increase in milk solids forecast payment which stands to benefit the economy by NZD500 million (US$361 million), may be used for debt reduction or reinvestment in farms by most drought-stricken New Zealander farmers.

The overall dairy farming industry has high levels of debt due to lower production levels and higher winter feed costs, hence many farmers will use the bonus to get their balance sheets in better order, analysts said.

Fonterra's milk price forecast increase to NZD6.10/kg (US$4.40/kg) is strongly based on the price received for milk powder.

The world's largest dairy exporter has kept its forecast distributable profit range at NZD0.40-0.50 (US$0.29-0.36) a share, and the target dividend at NZD0.20-0.30 (US$0.14-0.22) a share.

The distributable profit comes from Fonterra's consumer brands businesses, which have to pay market prices for raw milk, and prices received for products such as cheese and casein have not yet matched the increases in milk powder prices.

"With the very recent 21% step up in powder prices, Fonterra expects that margins earned on non-powder products will lag the higher returns of powders, putting some pressure on profits," Fonterra chief executive Andrew Ferrier said.

"However, our consumer businesses are having another very strong year and are achieving good increases in underlying earnings. These, together with lower funding costs, are the primary contributors in allowing us to hold our forecast range of distributable profits," he added.

The dividend range of NZD0.20-0.30 (US$0.14-0.22) a share indicates that the co-operative will retain NZD0.10-0.30 (US$0.07-0.22) a share.