Fonterra forecasting a record payout to New Zealand farmers - Cowsmo

Fonterra forecasting a record payout to New Zealand farmers

China’s growing thirst for milk has allowed New Zealand dairy giant Fonterra to forecast a record payout to farmers this season, another factor pushing the Reserve Bank of New Zealand to raise interest rates – and soon.

The planned increase in the payout “reflects continuing strong demand for milk powders globally,” Fonterra Chairman John Wilson said Thursday.

The higher payout adds to a list of positives about the New Zealand economy that’s heaping pressure on the central bank to raise its Official Cash Rate, or OCR, from a record low of 2.5%.

At its last meeting in January, held amid lingering concerns about the global economy, the RBNZ kept rates steady but signaled that rate increases were imminentas the employment picture improves, net immigration reaches a 10-year high and inflationary pressures mount. Gross domestic product rose 1.4% on-quarter in the three months to Sept. 30, the most recent data available, and 3.5% on-year.

Economists are widely expecting the bank to increase rates by a quarter-percentage point at its March meeting. Some, like ANZ BankANZ.AU +0.22% senior economist Mark Smith, expect the central bank to raise rates by three-quarters of a percentage point between March and June alone.

Data out Thursday from Statistics New Zealand points to China as the main source of dairy demand. That helped New Zealand record its first trade surplus since March 2012, and its highest surplus ever for the first month of the year.

Of NZ$4.1 billion (US$3.4 billion) in total exports, NZ$1.2 billion went to China – a leap of 92% from a year earlier. Milk powder, butter and cheese made up just over 40% of exports, and nearly half went to China.

Demand has continued despite a food-safety scare last year that threatened Fonterra’s market share. In August Fonterra said three batches of whey-protein concentrate might contain harmful bacteria, leading to product recalls in China, New Zealand and elsewhere.

Subsequent testing indicating the organism wasn’t harmful, but the fallout for Fonterra – the world’s largest dairy exporter — harmed New Zealand’s reputation as a food supplier. The impact on sales was only fleeting, however.

The Chinese “are still buying a heck of a lot of product from us, and at very good prices,” BNZ economist Doug Steel said.

High dairy prices expected to spill over into next season, which begins June 1, ASB Bank economist Nathan Penny said. The average winning price for whole milk powder at the mid-February GlobalDairyTrade auction was $4,999 a ton, while forward contracts for delivery in five months sold for more than US$5,100.

Given those prices, Fonterra announced Thursday it would pay NZ$8.65 per kilo of milk solids to its 10,500 farmer shareholders this season, compared to NZ$5.84 last season. That’s up from an earlier forecast of NZ$8.30 – equivalent to a cash injection of some NZ$600 million into the economy — and means New Zealand farmers stand to earn around NZ$5 billion more than they did in last year’s drought-marred season, according to Mr. Penny.

The record payout will provide a “big boost to incomes in the rural sector, and will be a key pillar of stronger growth in the New Zealand economy in 2014,” Westpac Bank senior economist Anne Boniface said.

ANZ’s Mr. Smith said the benchmark interest rate “needs to move up soon.” He notes, however, that “prompt action by the RBNZ, the still high New Zealand dollar and a still fickle global scene are likely to contribute to a relatively moderate OCR tightening cycle by historical standards.”

Source The Wall Street Journal


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