Fonterra has lifted its forecast farmgate milk price rice for the 2013-14 season by 50 cents to $7.50 per kg of milk solids and announced an estimated dividend of NZ32c per share - amounting to a forecast cash payout of NZ$7.82.
Westpac economist Nathan Penny said the lift in the milk price, combined with an expected rebound in production, represented a sizeable boost to New Zealand's national income.
"The NZ$1.70 lift in the milk price [compared with NZ$5.80 in the 2012/13 season] and a 5% lift in production would boost the economy by around NZ$3.4 billion or around 1.6% of nominal GDP compared to the 2012/13 season," he said, adding that there was "surprisingly little market reaction" to Fonterra's announcement. "Although, it is still early in the day for global markets."
Federated Farmers dairy chairperson Willy Leferink said farmers would be looking to repay debts taken on from the recent drought.
“Federated Farmers advice is really to bank the gains and run a prudent operation. As we know from the drought there may still be some climatic surprises to come," he said.
“Drought was a major factor behind farm debt growing to about $51.7 billion. It means much of the forecast, if it sticks, will go back into paying down these credit lines."
Fonterra's also announced a new dividend policy targeting a dividend payout ratio of between 65% and 75% of after-tax earnings. But Fonterra also says that forecast NZ32c payout for 2014 might be "outside" of this new range.
Fonterra's also indicating it won't in future be giving definitive forecast dividend numbers, but will give more detailed market commentary.
Chairman John Wilson said the higher milk price forecast for the new season reflected continuing strong international prices for dairy.
"At the beginning of this season, our forecast was that dairy commodity prices would continue at or near current levels until the fourth quarter of 2013," he said.
"However, supply constraints in Europe and China during the Northern Hemisphere spring have contributed to an increase in dairy prices of 3% cent over the past two months.
"In addition, the NZ dollar has weakened against the US dollar. These factors have contributed to our updated forecast."
Fonterra has also confirmed a further increase to the advance rate schedule, starting from $5.50 per kgMS.
"A higher Advance Rate provides our farmer shareholders a strong start to the season and the opportunity to grow their own farming businesses," Wilson said.
Fonterra also announced an amended dividend policy, aiming for 65-75% payout of profits.
"When setting the dividend, the Board will take into account short and medium term earnings to deliver a dividend per share of between 65–75% of adjusted net profit after tax over a period of time," Wilson said.
"The dividend remains at the board’s discretion, and subject to market conditions and Fonterra’s financial position."
Wilson said that from the full 2013-14 year the Fonterra board was adopting a "qualitative" earnings guidance approach, rather than the previous "quantitative" earnings per share guidance.
"The changes mean we will provide more market commentary – but will no longer put numbers around future earnings per share. This new policy will enable the business to provide a longer term view on any potential volatility in earnings," Mr Wilson said.
Fonterra's chief executive Theo Spierings said international dairy trade growth was currently being led by strong demand for powders (combined whole milk and skim).
"This trend, relative to prices for cheese and casein, currently would have a short term negative influence on product mix returns during the first half of FY14.
"As we drive for growth in our consumer businesses, during the first half of FY14 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins.
"Taking into account the headwinds we face and current market volatility, the FY14 estimated dividend of 32 cents per share may be outside the 65-75 per cent range.
"We will provide an update on business performance when we announce our Annual Result on 25 September 2013," Spierings said.
A milk price of $7.50 per kilogram of milksolids (kg/MS), now being forecast by Fonterra Cooperative Group for the 2013/14 season, is an ‘overdraft clearer’. Federated Farmers believes farmers will look to pay back credit lines extended to them during the drought.
Leferink said the Fonterra's forecast was "a beautiful opportunity" for farmers to build up cash reserves to further improve water quality.
"This not only supports Green Dairying into the future but is great news for our provincial towns and cities."
He said one of the explanations for why the GlobalDairyTrade results had been fairly strong was a tough Northern Hemisphere Spring followed by a hot Summer.
"This has impacted dairy production and we know the amount of milk available for global export remains thin."
A high payout could "turn into next to nothing if the weather does not play ball", Leferink said.
"We will be relying on the weather gurus to keep us up to date and for water storage solutions to come forward.
"Of course a high milk price can be a double edged sword for Fonterra’s overall performance as a company. It generally means the cost of raw ingredient which goes into finished product also rises.
"We believe there will be a lot of pressure on Fonterra to come up with a substantial dividend but a high milk price will put pressure on margins. That is not necessarily a bad thing as it will drive the company to perform," he said.