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Fonterra leaves cash payout for 2010/11 at up to NZ$7.80/kg; sets cash payout forecast for 2011/12 at around NZ$7.10/kg

Fonterra leaves cash payout for 2010/11 at up to NZ$7.80/kg; sets cash payout forecast for 2011/12 at around NZ$7.10/kg

Cash payout for 2010/11 forecast up to NZ$7.80/kg. First forecast for 2011/12 down around 9% to around NZ$7.10/kg.

By Bernard Hickey

Fonterra has announced an unchanged cash payout forecast for the current season at up to a record NZ$7.80 per kilogram of milk solids, meaning Fonterra's payout to farmers is likely to be around NZ$10.4 billion.

This is up around NZ$2.2 billion from the previous year and is due in part to a 4% incease in production to 1.37 billion kgs of milk solids and higher commodity prices. It is not clear yet though how much of that increase will be spent in rural economies, given many farmers are focused on repaying debt.

Fonterra said its distributable profit would increase 10 cents a share in 2010/11 because of higher profitability, but that it would retain this extra 10 cents a share to boost its capital. That left its cash payout unchanged from its previous forecast at NZ$7.75-7.80/kg and above the previous record cash payout of NZ$7.66/kg in 2007/08.

Meanwhile, Fonterra announced a lower first forecast for the new 2011/12 season for a cash payout of around NZ$7.10/kg, down around 9% from 2010/11.

The cash payout includes the milk price plus a distributable profit, but minus a capital retention. Fonterra retains 25-35% of its distributable profit to boost its capital.

Fonterra left its Fair Value Share price forecast for 2011/12 unchanged at NZ$4.52.

Fonterra said its total payout before retentions in the 2010/11 year would be NZ$8.00-NZ$8.10/kg, up 10 cents on the previous forecast because of improved profitability. But that extra profitability is be retained to boost Fonterra's capital. The final payout is set to be confirmed in late September.

Fonterra said the lower forecast for the 2011/12 year reflected a higher exchange rate and moderating commodity prices.

The opening milk price forecast for 2011/12 ws NZ$6.75/kg, plus a distributable profit of 40-50 cents a share.

“When we issued our previous forecast in February, we highlighted how the margin squeeze due to higher milk costs was affecting operating earnings especially within our ingredients businesses.  We also signalled that higher commodity prices were also starting to have a negative impact across the consumer businesses," said Fonterra CEO Andrew Ferrier.

“Since February, our ingredients businesses have recovered some lost ground in terms of operating earnings, as commodity prices have levelled off and our ability to make profits above raw milk costs for other dairy product streams has improved.  On the downside, our consumer business in Australia and New Zealand has faced earnings pressure as we predicted earlier.   This business is partially absorbing higher dairy ingredients costs due to intense market competition and because of initiatives such as our decision to freeze the price of liquid milk sold to retailers in New Zealand.”

Tax benefits expected

Ferrier said in spite of the very strong global commodity prices, operating earnings within the Commodities & Ingredients businesses and the Consumer Brands businesses in total were expected to be marginally ahead of 2010.  The updated profit forecast also now recognised expected tax benefits associated with projected dividend payments, retentions and one-off items.  

Chairman Henry van der Heyden said: “Although current market prices and exchange rates would still yield a Milk Price similar to this season’s, recent months have been characterised by a softening in commodity prices and continued strength in the New Zealand dollar.  As commodities are mostly sold in US dollars, a higher exchange rate hits the Milk Price.  We must also be aware of the potential effect that current high commodity prices may have on dairy market dynamics, as high prices tend to encourage more supply into global markets from a number of countries.”

Grant Samuel’s latest valuation of Fonterra's Fair Value Share was 2% lower than its 2010/11 assessment (mid-point NZ$$4.27) and 6% lower than its interim estimate for 2011/12 (NZ$4.45 mid-point) published in December 2010.

Ferrier said the change in valuation since May 2010 was mostly due to a slight reduction in the valuation of the Commodities & Ingredients business segment, driven by the impact of higher commodity prices on segment earnings. 

The aggregate value of the consumer businesses had increased slightly over the past year, led by a rise in valuation for the Asia, Africa/Middle East businesses, partially offset by a slight decline in value for Australia/New Zealand reflecting a lower rate of earnings growth due to tougher trading conditions, Fonterra said.

See our interactive dairy commodity prices chart below

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i think 90 - 95% of the payout will be used to retire debt.  I wouldn't hold my breath for much, if any extra kick

More payout! That's more profit  -more potential tax. The farmers had better buy something of a capital gain nature, to offset that tax liability.

No, just need to up the operating costs and have legimate business deductions.

That will be needed to avoid a tax bill no farmer wants, and that will be good flow on for the wider community.  Paying down debt is definately on the agenda at present ,as you identify Martyn, but a good prospective tax bill will be cause to get the cheque book out soon enough.

just need to up the operating costs and have legimate business deductions

Could you expand on the logistics of that? Are they going to hoard fertiliser or something?

So it  costs 25c/kg to meet full emissions costs, and that's too much to bear because the cockies have such high debt because they went silly trading farms with no CGT?

That's bullshit.

So what?

are you being funny muzza?


The dairy industry are being subsidized by being allowed to pollute at no cost, when they (you) could eliminate that pollution by allocating less than 5% of your income to it. That is a subsidy being paid to mainly (supposedly) pro-free market user pays right of centre types. THAT is bullshit. 

VL: they (you) could eliminate that pollution by allocating less than 5% of your income to it. How do we eliminate pollution by allocating less than 5% of our income to it.  What will we be doing with that 5% that is going to magically wipe away our pollution?  That is just bollocks.  This money is going to fund  R&D tax credits. 

Who pays it - the farm owner, the 50/50 sharemilker, the contract milker? A farm owner with a 50/50 sharemilker will pay 10% not 5%.

If Fonterra on it's own can find $100m to pay for R & D why can't other industries pay a levy like the ag guys do to fund R & D.  I'm a bit partial to angel investing so I do my bit, but I have a problem in paying a tax for which there is no conclusive science, but plenty of emotion/politiking.

ah CO, nice to hear from you.

what will you do with that 25c/kg?    plant riparian zones, build/maintain effluent ponds etc. also, buy a nice pint handle and go down to your border stream and drink a pint of it every morning. if it gives you the shits you know that you and your neighbours still have work to do. (i"m 49%joking there CO)

who pays for it? i'm sure you can figure it ownership structures can be complicated as you know, but i would suggest that as you sit on the crapper thinking about how revolting that river water really is, you'll be well and truly incentivised to find a solution (the free market in action!)

as for r&d i'm all for it. as a paye slave i'd be quite happy for part of my tax to go to r&d and i'd like to think that others would too...


I will take the water out of my farm streams any day over the town water from around here where I live VL. Never had to put a 'boil before you drink' notice on the farm water but the local town here has had a few this year already. :-)

Had some neighbours once who got the shits when another neighbour's effluent pond opened up on the bottom, completely empty, then closed up again during an earthquake.  But that's the only time I have heard of cockies or their families getting sick from the water. I do know of some mates who have gone tramping and got giardia from the stream in the national park they were hiking in.

As to ETS - it's lunacy to bring in an agricultural ETS when no other country in the world does or has shown any intention of doing so.  Goff shows his ignorance by assuming that farmers can afford to pay an ETS.  One drought year takes three years to recover from.  Some farmers have had 3 seasons of back to back drought. This won't just catch dairy.

I have no problem paying tax - I pay quite a bit of it, but to have to pay an ETS because a govt simply has no balls to make the hard decisions, is a folly.  As it will be shown to be when payout continues it's decline - it is simply not sustainable to fund R & D this way.

I'm sure the disestablishment of Ministry of Women's Affairs could save the govt the $160m/pa that they need for the R & D credit ;-)

Be brave VL breakout of being a paye slave - go get yourself a business. ;-)

should be paye free in 5 yrs CO. thanks for the encouragement.

i agree they could find money for r&d if they wanted to. plenty of fat to trim in wellington. the womyn's ministry, as you suggest. i'd also can the mp remuneration authority and just peg it to the average wage from now on. bring on the big kahuna cut winz and half of ird. nice. plenty of places to start.


i went swimming with the kids in the manawatu over summer with the kids and we all got sick. those are the farmers i'd like to see drinking it. you know 'that' type of cocky CO. as i'ce said before your way of calm, rational worldliness takes a lot of fun out this dairy bashing ;-)

and yes the ets is probably a scam at best. why do emissions need to be traded btw? it seems that ther'll be govts and traders clipping the ticket with the ets and we'll still be waiting for the proposed results. as i've said before, let people do things the way they see fit but just have enforcement with teeth at the punishment it effluent ponds or finance companies i think people are more thoughtful when they really have some skin in the game.


anyway, its late. say hi to yer coos for me.

Neco, don't ask me, ask the accountants, they are well paid to do that sort of stuff.

Well done Fonterra. Another record payout and another solid one coming up to boot by the looks. I well recall the derision Sir Henry got at this stage last year when he stated that given all known factors at the time an $8 payout was possible. Sir Henry 1, Knockers 0!

We should be very thankful that the dairy farmers of NZ have such a co operative culture. Each of them is sitting on a pile of Fonterra shares that could be sold off to a multinational for megabucks but they choose to maintain control of their own desitiny retaining profits in NZ. Coming from the fragmented sheep and beef sector I can only look on with admiration.

That said, I am aware of at least one winter lamb contract in the market at $8kg which is a wonderful turn around for our sector. Fonterra will have to stay on its game or we might see dairy farms converting back to sheep!!!!

Good to hear from you SS.  :-)

Yep ag is in a good position at present.  Great to hear you folks are still having a good time of it and it's looking good in the future too.  Will give heart to the young farmers. (Of which of course you are one ;-))



SS, you are back and about when I expected.

I think you are trying to massage history with this statement:

I well recall the derision Sir Henry got at this stage last year when he stated that given all known factors at the time an $8 payout was possible.

This is what Sir Henry said or at least as it is quoted on Fonterra's website - the link is below:

  • Sir Henry said if international dairy prices and foreign exchange rates were to hold to current levels for most of the coming year, then it is possible that the 2010/11 payout could be well over $8.00.
  • And later in the same article with reference to Fonterra's $6.90-$7.10 forecast payout:

  • “That’s what the market looks like right now, but we know that there is substantial volatility in the market."

    Sir Henry's "could be well over $8.00" comments were out of line with Fonterra's own forecasts at the time, and Fonterra's current forecasts are still short of what most would consider to be "well over $8.00".

    That appears to still be a sensitive issue in some quarters. I don't know why, and suspect Sir Henry might prefer the matter to quietly fade away.

    On another subject from earlier, I left you with a request to explain why agricultural sector debt had not reduced significantly given we agreed that agriculture was having its best year in decades (NZ's golden age of agriculture and all that). Figures available at the time were that year on year to March 2011 agricultural debt had actually increased slightly as had forestry and food processing sector debt.

    The opportunity to respond regards the debt is still open.

    Ah Colin, the knocker in chief himself!

    Thank you for confirming my recollection of Sir Henry's statement. You are welcome to split hairs over context.

    As for the ag debt senario, I think figures to the end of march dont take into account the lag effect. I know from my own case and from others in this area current accounts have been very high due to slower growth rates in lambs and plentiful feed supplies leading to a far later mean kill date. Whilst there was some short term cashflow issues the end result is heavier carcase wieghts and a $50 per head increase in returns in excess of last season, which are now in the bank.

    As for the dairy cockies, im sure you are aware the $8 plus figure is still only a forecast payout and the final lump sum gets distributed in October(I think). That would be a fairer time to pass judgement on rural debt trends.

    I agree on it being too early to call the debt picture - it may take 12-30 months before it is clear where interest rates are going longer term or whether agricultutral debt is ever going to trend down. We are in very uncertain times.

    As they say: "May you live in interesting times" is a curse.

    I noted Lachlan Mackenzie's caution yesterday on Midday Report in poining out what happened to forecast dairy payout for the 2008/2009 season. From a similar opening forcast ($7.00+) ending at a final payout of $5.20.

    I'm not sure what all the anguish is about concerning farmers repaying debt at a time of high prices - In my opinion, extremely sensible and a sign that they've learnt a few lessions that they hadn't back in 2006/08. Whilst I appreciate that it will slow the recovery because they're not spending as much, it is bracing the economy against any further commodity shocks that still have every chance of occuring in the future. The world is in an extremely vunerable state where risk management is the name of the game - foreign exchange, interest rate & commodity prices.