Recovery could boost payout by Fonterra

As dairy commodity prices rise, sending a faint but warming light into the country's cowsheds, it is not beyond the bounds of possibility that Fonterra might soon lift this year's payout forecast reports The Dom Post. The next payout review is scheduled for December, but Fonterra's policy is to announce a change ahead of time if the change amounts to more than 30c a kilogram of milksolids. Such gains may well have been made. Wholemilk powder prices at auction - which, admittedly, involve only 10 per cent of the dairy giant's production - have jumped 50 per cent in two months and should have been accompanied by a strengthening in other powder, milkfat and cheese prices not sold through the auction. On the other side of the ledger is our mad dollar, which refuses to act reasonably, and a lingering uncertainty in world markets that the so-called green shoots of recovery might yet be browned off by a late frost. But, overall, there's a feeling of optimism creeping in and Fonterra may decide to act in the next few weeks. Another reason to expect a lift in the payout forecast - which, at more than 30c, would take it to $4.85-$4.90 - is the beneficial environment it could create for discussion of the co-operative's restructuring plans. Fonterra will put to farmers on Friday a proposal that it says will take care of its capital structure problems for the "immediate future". Details are being kept firmly under wraps but it has already ruled out opening up the company to outside investment. It says the proposal will have three stages to it which, if supported, will open up a range of options for a fourth stage. It's a fair assumption that the success of the proposal will depend on farmers being prepared to support it financially. Unfortunately, it comes at a time when many are under severe financial constraint after a $5.20 payout in the season just ended and a $4.55 forecast for the current one. Fonterra's view could be that while some farmers will want to spend the extra payout on reducing debt, others may decide to invest it in the future stabilisation of their co-operative. After all, there's no doubt farmers have already battened down the hatches in anticipation of $4.55. Their budgets, feed as well as financial, will be based on that. Giving some money back to the bank might be necessary for some, but others may decide if they don't have to, why should they. If they did reduce debt, then needed to go back later to re-extend the overdraft, the bank might say no. What it can say is that it is doing its own budget-tightening. It has been selling non-core assets and is reviewing its minority holdings in other companies.