Fonterra farmers will have more money flowing into their bank accounts in the new year thanks to a 25 cent increase in pay-out announced today.

Fonterra Co-operative Group Limited's revised pay-out forecast range for the 2012/13 season is now $5.90 - $6 before retentions for a fully shared up farmer - 25 cents up on the previous forecast range.

'The immediate effect of this decision is that our farmers will have more money flowing into their bank accounts from late January when they are paid for the previous month, and that will help them with their cashflows,” says Fonterra Chairman Sir Henry van der Heyden.

Henry says after considering farmer shareholders' cash flow requirements, and the strength of the co-operative's balance sheet after the launch of Trading Among Farmers, the board had also decided to lift advance rate payments to farmer shareholders.

'Between 1 August and the most recent Global Dairy Trade (GDT) trading event, prices have increased by an average 17.7 per cent. While there was a drop at last week's GDT event, it has not changed our overall commodity price forecasts.”

The increase has also been welcomed by Federated Farmers with dairy chairperson Willy Leferink say it's an early Christmas gift.

'This will be a huge relief putting clearer air between our costs and projected revenue.

'I must confess we were expecting this revision and I imagine the markets were as well. It was probably a case of getting the Fonterra Shareholders Fund away first.

'As Fonterra noted, Global Dairy Trade prices have increased by an average of 17.7 per cent since August. Over recent times farmers had seen more gains than falls on the platform too.

'But before too much is read into this revision and people end up confusing revenue with profit, the Ministry for Primary Industries National Dairy model had forecast a cash deficit of $19,000 inside the farm gate this season.

'Fonterra's revision upwards looks like turning that from red to a modest black. The cash surplus is more likely to be around $21,000 if the current forecast sticks.

'It needs to be remembered that modelled farm working expenses and interest payments now represent $4.99 kg/MS. On the old milk price of $5.25 kg/MS that didn't leave much freeboard, if any.

'The latest milk price revision of $5.50 kg/MS is also a long way short of the $6.08 kg/MS farmers were paid for their milk last season.

'Federated Farmers advice is to maintain austere budgets and prioritise spending that saves your farm business money, like your Federated Farmers membership. There could be economic shocks to come like what is brewing in the United States with its ‘fiscal cliff'.

'We also need to be mindful that without wide scale water storage, the Kiwi economy is acutely vulnerable to the vagaries of rainfall in some of our key farming areas. There are pockets of dry now appearing too.

'Having seen one headline wax-on about a six-figure payout, I must again caution not to confuse revenue with profit. This expected revision is welcome and is great for morale before Christmas but it will not set the tills alight,” Willy says.

The Fonterra Board announced:

• a higher forecast Farmgate Milk Price of $5.50 per kilogram of milksolids for the 2012/13 season, up from $5.25 on the previous forecast; and
• a forecast Net Profit after Tax range of 40-50 cents per share, consistent with the recent Fonterra Shareholders' Fund Offer prospectus;
• a 40 cent increase in advance rate payments to farmers.

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).

Chief Executive Theo Spierings says Fonterra's strong balance sheet meant that from a cash flow point of view the co-operative was in a position to increase payments to farmers over the next few months without any significant risk to its financial stability.

While the outlook for any movements in the New Zealand dollar exchange rate were neutral, the impact of weather events in other markets were likely to support the lift in forecast Farmgate Milk Price.

'There has been a persistent, serious drought in the United States. That has pushed up the price of grain, which in turn affects dairy production. There are also concerns about drought in the Ukraine and Russia. In South America, extreme wetness in parts of Brazil and Argentina could also depress wheat production.

'Given current global conditions, our forecasting anticipates global dairy prices are likely to move higher in the first half of 2013.”