Fonterra dairy forecast higher than expected

Despite Fonterra’s payout dropping from the $8 to $8.10 range for the current season, today’s forecast is the third highest payout on record and set to generate strong on-farm profitability, according to BNZ Chief Economist Doug Steel.

While the new season’s total figure is down on last season, it is higher than pre-announcement estimates.

Mr Steel says, “This is a positive for the economy with the strong dairy revenues set to support the recovery forecast.

“Across the entire dairy industry, this indicative price suggests overall 2011-12 dairy revenues in the vicinity of $11.1 billion, down 8% from last season’s (revised) $12.1 billion.

“The forecast is for a payout that is elevated relative to history. In context, the $7.10 mid-range forecast for the coming season compares with the 10-year average payout is $5.42 and 5-year average payout $6.46.”

Mr Steel says that strong demand from the emerging markets, including China, is currently supporting international dairy markets. “China’s market share of New Zealand dairy products has increased to around 20 per cent by value over the past year, from around 5 per cent only three years ago”, he says.

“This is part of the wider-Asian growth story, which New Zealand dairy and wider New Zealand agriculture is well placed to tap into. Asia’s share of New Zealand dairy exports has been trending higher over the past two decades and Asia now takes more than half of New Zealand’s dairy exports, by value.”

BNZ Head of Agribusiness Richard Bowman says, “When combined with the final payments for the 2010/2011 season, this payout puts dairy businesses in a strong position to drive long-term success.”

BNZ supports sector specialisation and Agribusiness has seen the bank grow its sector share by around 1.5%.

“This payout will give New Zealand dairy farming families and businesses a significant opportunity to generate wealth in the long term. Businesses should take this opportunity to carefully consider what to do with cash surpluses, including paying down some debt, investing in the business, or saving,” he says.