Fonterra farmers will receive on average, an advanced payment of around $100,000 to help them cope with the impacts of the severe drought.

Fonterra chairman John Wilson says the money is urgently needed by many farmers who will have in fact spent it before they receive it, on feeding cows.

Fonterra increased its current forecast cash pay-out for the 2012/13 season to $6.12 for a fully shared-up farmer.

'Backed by our strong balance sheet and operating cash flows, we were able to increase the advance rate paid to farmers for their milk. The faster advance rate together with the higher forecast Milk Price means on average farmer shareholders will receive $100,000 earlier in the season,” he says.

'This is particularly important to our farmers. It means we are getting cash to them faster, as they begin to dry off their herds for the winter earlier because of the drought and no longer have milk flowing.”

The company's strong financial performance meant it was in a position to assist farmers in this way, but the board had set the advance payment at a level which takes into consideration the volatility of the current world economy.

'The last thing we want is to put farmers in a position where we have to claw back payments because that would be a nightmare for farmers.”

The co-operative has today lifted its current forecast cash pay-out for the 2012/13 season to $6.12 for a fully shared-up farmer, based on a higher forecast farm gate Milk Price of $5.80 per kgMS and a forecast dividend of 32 cents per share.

It has also narrowed its earnings per share guidance to 45-50 cents per share.

The higher forecast was on the back of a strong first half performance by Fonterra, which saw net profit after tax increase by 33 per cent to $459 million, following a particularly robust performance by NZ Milk Products and significant lifts in sales volumes in Fonterra's Asian and Latin American brands. These achievements were partly offset by continuing challenges affecting the performance of the Australian business.

The new forecast reflects a recovery in global dairy commodity prices over the past two months but John says there is no certainty prices will remain at that level.

'Prices have increased in seven of the last fortnightly auctions on the online trading platform GlobalDairyTrade (GDT). The GDT-Trade Weighted Index is now 26.7 per cent above where it stood in February when the board issued its last forecast.

'World dairy trade growth is being led by powders (combined whole milk and skim), reflecting strong demand at a time when global supply is constrained.”

John says Fonterra and its farmers had excellent spring and early summer growing conditions across most of the country leading to strong growth in New Zealand dairy production and record volumes in the first half.

'However, the dry conditions in the North Island since January have created real challenges for our farmers, with many turning to supplementary feeds and shifting to once a day milking to maintain the condition of their herds.

'The drought in the third quarter has been more severe and lasted longer than anyone might have predicted, and means we are currently forecasting total milk collection volumes for the full season to finish in line with last season.

'Coping with the climate is part of farming. But there is no denying the stress that a drought causes and at times like these, farmer shareholders are looking for support from their co-operative.

'With the strong first half performance, the board has lifted the interim dividend from 12 to 16 cents, 33 per cent higher than the comparable period. Sixteen cents represents 50 per cent of Fonterra's forecast dividend for the current financial year, and the maximum available under the 40-50 per cent range in its dividend policy.”

Fonterra chief executive Theo Spierings says NZ Milk Products' strong first half reflected the drive to achieve increased volume and value – two core elements of Fonterra's business strategy.

'Despite the drought taking effect in the North Island in January, it was a different story for those in the South Island where the rainfall was higher than last summer. Fonterra's milk collections for the season to the end of January were up 6 per cent on the same period in 2012 – which in turn flowed into record production, and another new export volume record achieved in December 2012.

'The commissioning last year of the co-operative's new Darfield site – where the Darfield Drier 1 can process 2.2 million litres of milk at peak in one day and produce 15 metric tonnes of milk powder per hour – was one of the factors that enabled NZ Milk Products to process the higher peak milk flows and deliver a strong performance.”

Looking ahead, Theo says Fonterra's strong first half earnings were unlikely to be repeated in the second half.

'For the full year, we expect to see total milk volumes for the current season to be in line with last season. The on-going volatility in commodity markets could have a negative impact on product mix profitability.

'In many of our consumer markets, we are expecting intensified competition in the second half – particularly in Australia – and in Asia we are seeing signs of demand slowing.”