Fonterra’s new forecast payout is high given market volatility but it reflects good contracts secured by the cooperative.

Lincoln University farm management and agribusiness professor Keith Woodford says although international milk powder prices are high, the expected payout of $6.05/kgMS ‘is still very high even in relation to these latest prices given the exchange rates.

‘Therefore Fonterra must have some very good contracts in place to be able to predict this figure, and other companies are going to be challenged to match them,’ he told Rural News.

Woodford believes the new forecast payout should be ‘reasonably accurate’ as the cooperative has more than 80% of this season’s production sold.

He says with 80% of the exchange rate hedged, the final payout ‘should not vary up or down by more than 40c at the most’.

‘This is the time of the year that predictions start to become much more accurate.’

ASB Bank chief economist Nick Tuffley agrees any further hikes in the forecast payout for 2009-10 will be modest.

He rules out the payout reaching the record $7.90/kgMS of 2007-08 season unless there is ‘a dramatic’ increase in dairy prices.

‘The dairy outlook can change dramatically and just about anything can happen,’ he told Rural News. ‘The $7.90/kgMS payout sets a very high benchmark.

‘The world dairy market will need to see some dramatic increases for us to see that sort of payout again.’

Fonterra has increased its milk price by $1.10 to $5.70/kgMS while the value added return is 15c lower at 35c/kgMS.

The new forecast is 95c more than the revised forecast of $5.10/kgMS announced in September.

Fonterra chairman Sir Henry van der Heyden cautions that a big gain in the payout forecast reflects the level of volatility in the market.

‘It’s heading in the right direction and we’re making the most of the opportunities for our farmers,’ he says. ‘But, we also know there’s a risk of rapidly rising prices potentially bringing on more milk from other countries.

‘We saw this happen in 2007 and we saw how quickly the market can fall as a result.’

Woodford agrees that ongoing volatility can be expected.

Although commodity prices in general are now rising, the rises in international dairy prices have been spectacular and more than for other commodities.

‘What seems to happen is that when purchasers decide to build inventories then prices go up very rapidly,’ says Woodford.

‘Then, as soon as they get a sniff that prices might be declining, they hold back in their purchases and this accentuates the downturn.’

Woodford says this ‘crazy’ behaviour has become a reality in the global dairy market.

‘So although the outlook is good, the optimism needs to be mixed with caution, as there is still likelihood for volatility,’ he says.