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Fonterra Raises Payout, Cushioning Blow From N.Z. Drought

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Fonterra Raises Payout Forecast as Drought Boosts Milk Prices
Crates filled with bottles of milk sit in a chiller prior to loading for shipment at the Fonterra Cooperative Group Ltd. factory in Takanini, southern Auckland, New Zealand. Photographer: Brendon O'Hagan/Bloomberg

March 27 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its forecast payout, boosting farm incomes and cushioning the economic cost from New Zealand’s worst drought in at least 30 years.

Fonterra expects to pay its 10,500 farmer shareholders NZ$5.80 ($4.87) a kilogram of milk solids in the 2012-2013 season, compared with a December forecast of NZ$5.50, according to a statement today. The Auckland-based company said that the higher payout reflected a recovery in global dairy commodity prices over the past two months.

Higher farmer incomes could help offset the drought’s cost to New Zealand, which the government estimated may be as high as NZ$2 billion as economic growth slows. Central bank Governor Graeme Wheeler said on March 14 that the drought trimmed as much as 0.3 percentage point off the Reserve Bank of New Zealand’s previous projections for growth in the first half.

The forecast increase “will mitigate the impact of the drought to some extent,” said Nathan Penny, an economist at Westpac Banking Corp. in Auckland. “Farmer incomes, production and the second-round impacts flowing from the drought are all likely to be better than we previously anticipated.”

Whole-milk powder climbed to a record last week as New Zealand’s dry weather conditions curbed supply. Fonterra forecasts that milk collection will finish in line with the previous season after favorable weather resulted in record dairy production volumes in the first half.

Shareholders’ Fund

Fonterra Shareholders’ Fund, an equity product that tracks the co-operative’s dividends and earnings, rallied 5.7 percent to NZ$7.45 at the 5 p.m. close in Wellington. That’s the highest close since the shares began trading on Nov. 30.

While Fonterra reported a 33 percent rise in first-half net income to NZ$459 million, the company said that the drought was likely to weigh on second-half earnings.

“The drought in the third quarter has been more severe and lasted longer than anyone might have predicted,” Chairman John Wilson said in the statement. World dairy price growth was “reflecting strong demand at a time when global supply is constrained,” he said.

Wholesale demand for milk powder could eventually fall off if “prices remain at this level or possibly even higher for a longer period of time,” Chief Executive Officer Theo Spierings said in a Bloomberg Television interview. There were no signs of that happening yet, he added.

The New Zealand dollar bought 83.74 U.S. cents at 5:15 p.m. in Wellington, compared with 83.93 cents before Fonterra’s forecast revision.

Fonterra was also seeing “intensified” competition in its consumer markets in the second half, especially in Australia, and saw signs of slowing demand in Asia, Spierings said in the statement.

Whole-milk powder climbed to an all-time high of $5,313 a metric ton on March 19, according to Fonterra’s GlobalDairyTrade website, after New Zealand’s entire North Island was declared in drought. The previous record was $4,958 on March 1, 2011.

To contact the reporters on this story: Chris Bourke in Wellington at cbourke4@bloomberg.net; Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: Chris Bourke at cbourke4@bloomberg.net

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