Fonterra Announces 60 Percent Increase in Payout Forecasts

30/05/08 Fonterra has announced a 60 cent increase in the Co-operative’s 2007/08 forecast payout to $7.90 per kg of milksolids (kgMS), and a record opening forecast of $7.00 for next season.

Fonterra signalled in April the potential for further upside in this year’s payout, and Chairman, Henry van der Heyden said it was satisfying to be able to confirm a further increase in payout – particularly given the current volatile trading environment and unstable financial markets increasing Fonterra’s cost of capital.

Mr van der Heyden said this season’s record payout and the strong forecast for 2008/09 gave “every reason to be confident about the outlook for dairying”. The new forecast for the current season is made up of a milk price of $7.55 and a value component of 35 cents.

“This is good news for our farmers to have the extra cash flow at a time when they are facing sharply rising input costs, which DairyNZ confirms are up by 32% over the past year. It will also go some way to make up for the production lost this season due to the drought.”

Mr van der Heyden said, at a time of slowing economic growth, this season’s Fonterra payout would inject around $9 billion into the economy on top of 10,000 local jobs and the broader stimulus of dairying, stretching across rural and urban New Zealand.

Key factors in the latest increase in payout were the continued strength of international dairy commodity prices – underpinned by a shortage of New Zealand production due to the drought – a weakening New Zealand dollar, along with performance gains within the company.

Fonterra’s final payout for 2007/08 will be announced in September. Given the instability in the financial markets the Board has signalled the likelihood of retained earnings of around 30 cents/kgMS but this would not be finalised until September, Mr van der Heyden said.

While the demand outlook was positive and there were tangible performance gains across Fonterra’s businesses, he said uncertainties in the external environment required the Fonterra Board to take a prudent approach.

Fonterra Chief Executive Andrew Ferrier said: “There is an unprecedented level of volatility in all agricultural commodities, forecasting prices is more difficult, and there have been fundamental changes in equity markets – all of which we need to take into account in running the business.

“In recent seasons, there has always been a higher probability that the forecast would go up. Next season the volatility in prices means there is an equal possibility of it going up or down,” Mr Ferrier said.

Fonterra’s Fair Value Share price for 2008/09 has been set at $5.57, a fall of $1.22 on this season’s price of $6.79, partly because of the high commodity prices driving payout. This fall is broadly comparable with the drop in share prices in New Zealand over the past 12 months.