Big lift in Fonterra payout

The 19% increase in Fonterra's forecast payout will lift dairy farmers' incomes by between $1.2 billion and $1.3 billion, economists say, but how much it boosts the wider economy will depend on how much they allocate to reducing debt reports The NZ Herald. Fonterra lifted its forecast payout to farmers to $6.05 per kilogram of milksolids, up from the $5.10 announced in September. ANZ National Bank economist Kevin Wilson said the increase would return the sector to profitability and reduce stress levels. But with the dairy sector's debt levels having increased by around $4 billion over the past year, debt repayment would be uppermost in many farmers' minds, he said. Westpac economist Doug Steel said the higher forecast was unequivocally good news for the economy. "It will relieve a lot of the cashflow pressures farmers have been under in the past 12 months," he said. "Some that have put expansion plans on hold may dust them off and have a look around. But there may be a fraction more caution than in the last run-up." There were words of caution in Fonterra's announcement yesterday. "A big gain like this in the payout forecast just shows how much volatility there is in the market," chairman Sir Henry van der Heyden said. "It's heading in the right direction ... but we also know there's a risk of rapidly rising prices bringing on more milk from other countries." Although the company has some currency hedging in place, significant uncertainty about the medium to longer-term outlook for the exchange rate remained.