Dairy farmers received some positive news yesterday.
Fonterra announced an increase for milk solids of 55c a kg in its forecast payout for this season.
This would boost, from earlier estimates, the income of an average farmer by $55,000.
The co-operative said a sustained improvement in product prices meant it expected to pay farmers $5.10 a kg of milk solids (kg/ms) for the 2009-10 season, up from an earlier forecast of $4.55 kg/ms, and consistent with the expected payout for last season.
However, Fonterra chairman Sir Henry van der Heyden warned the New Zealand dollar trading at about US70c remained a concern.
Ironically, the dollar rose nearly US1c after yesterday's news of Fonterra's higher payout and a better-than-expected current account deficit.
Fonterra's final payout for 2008-09 will be announced later today, along with its final accounts; but farming leaders expect it to be close to earlier forecasts of $5.20 kg/ms.
Sir Henry said yesterday the $5.10 kg/ms forecast was made up of 60c kg/ms increase in the milk price to $4.60, and a 5c decline to 50c in the profit, or value return.
This followed long-term contracts being negotiated at $US3000 ($NZ4186) a tonne; and a sharp recovery in whole milk powder prices, which lifted, on average, 25% in each of Fonterra's last two globaldairytrade internet auctions.
Sir Henry said while powder prices had been strong, the lower forecast profit was due to prices for cheese and casein lagging behind powder.
Chief executive Andrew Ferrier said prices remained volatile, which made forecasting difficult, but the underlying signs pointed to a price recovery, especially in powder.
"What we're seeing in the international market is the firming of a trend, with a more positive sentiment and stronger demand producing better pricing across the board."
While the New Zealand dollar trading at or above US70c for the last week remained a blot on the horizon, Sir Henry said it had been factored into the forecast prices.
Fonterra had based its payout on an exchange rate of US59c and previously said that a 1c shift in the exchange rate early in the season equated to a 10c kg/ms movement in the payout.
But exchange rate hedging by Fonterra reduced the effect of the currency shift late in the season.
Economists were united in their view the exchange rate was overvalued, and there would be a correction, but Berl chief economist Ganesh Nana said this week countries were managing their currencies at low levels.
Dr Nana believed a natural rate for the trade-weighted index was mid-US50c, but he doubted it would fall to a level low enough to generate sustained export growth.
Federated Farmers dairy chairman Lachlan McKenzie welcomed the higher payout, saying it was not a sign of a recovery, but would provide some relief for stretched finances.
But he warned farmers to maintain conservative budgets.
