NZ dairy price windfall more likely to be reinvested than spent

Tuesday 27th April 2010

Fonterra Cooperative Group’s 40 cents-a-kilo-of-milk solids increase in forecast payment to $6.10, which stands to benefit the economy by $500 million, may not have the monetary policy implications that past increases have generated.

Goldman Sachs JBWere economist Philip Borkin said that drought-stricken farmers will have lower production levels and higher winter feed costs.

“We also suspect that many will use the windfall as an opportunity for debt reduction or reinvestment in their farms,” he said. “They won’t be racing down to the Holden dealership or buying a new pool, and it won’t have a massive impact on monetary policy.

Borkin said the overall dairy farming industry has high levels of debt, and that many farmers will use the bonus to get their balance sheets in better order.

Even as a net positive for the economy, Borkin doesn’t expect it to alter the Reserve Bank’s Thursday statement on monetary policy, and is still picking September as the first time the overnight cash rate is raised from its present 2.5%.

Fonterra’s milk price forecast increase to $6.10/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 40-50 cents a share, and the target dividend at 20-30 cents 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 haven’t 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.”

The dividend range of 20-30 cents a share indicates that the co-operative will retain 10-30 cents a share.

Businesswire.co.nz

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