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Fonterra forecasts higher payout

NZN 25/05/2016

Dairy giant Fonterra is forecasting its payout to farmers for the coming season will be $4.25 per kilogram of milk solids - less than most economists had tipped.

It is a 35 cents per kilogram increase in the payout for the current season which remains at $3.90/kgMS.

Despite the lift in the forecast for the 2016/17 season it remains below the level that is the break-even point for many farmers.

Most economists were expecting a higher forecast with most expected something in the region of $4.40-$4.90.

"We are expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices, however we continue to urge caution with on-farm budgets," said Fonterra chairman John Wilson.

He said the high New Zealand dollar was impacting on milk prices and its forecasts.

The New Zealand dollar fell to 67.23 US cents, from 67.63 cents before the announcement.

Fonterra will increase the advance rate to farmers for the new season to help with cashflows and said it would also bring forward payments for the current season.

There has been a ray of light for farmers of late with prices at the fortnightly GlobalDairyTrade auction rising three times in the last four auctions.

Chief executive Theo Spierings said demand for dairy was expected to grow and prices would eventually recover.

ANZ Bank said the forecast was lower than expected as the dairy giant erred on the side of caution.

"That opening estimate or 'stab' is a bit of a reminder I think that the dairy sector is going through an elongated adjustment," said chief economist Cameron Bagrie.

"They have come in on the low side, that might prove to be conservative but it does suggest to me that they're pretty cautious about when we are going to see in a sustained fashion that uplift in prices."

ANZ was still anticipating the Reserve Bank would keep interest rates unchanged at its review next month.

"There's enough in the broader economic story to keep the Reserve Bank standing pat at the moment," he said.

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