#Fonterra's Expected Payout Increase Would Pump Billions Into New Zealand Economy

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Farmers won’t be the only ones cheering if Fonterra Co-operative Group, FCG.NZ +0.13% the world’s biggest exporter of dairy products, raises its forecast annual payout because of stronger milk prices.
That could mean as much as 3.6 billion New Zealand dollars (US$2.9 billion) for New Zealand’s economy, which is already outperforming many of its developed peers.
In late May, Fonterra forecast it would pay farmers NZ$7 (US$5.62) for each kilogram of milk solids produced in the year ending May 31, 2014, after global dairy prices surged in the wake of a drought that hit New Zealand. That’s up from $5.80 for the previous year. But economists are now saying they expect $7.30 or more when Fonterra announces its payout plan, expected early Wednesday.
New Zealand, which accounts for about a third of global exports of dairy products ranging from cheese to baby formula, experienced its most severe drought in nearly seven decades during the Southern Hemisphere summer, according to government estimates. Milk collection in April was down 34%, pushing prices to a record high that month. Though prices have eased since then, they are still up 43% since the start of the year.
The dairy industry is the backbone of the New Zealand economy, contributing around a quarter of its export income. The likely uptick in dairy earnings comes at a time when it is already faring better than many of its peers—with nine consecutive quarters of growth, a nine-year high in the pace of manufacturing expansion in May and a three-year high in consumer confidence in June.
Con Williams, an economist with Australia & New Zealand Banking Group Ltd.,ANZ.AU -0.17% said the pending season’s dairy payout had «upside risk written all over it,» tipping a lift toward NZ$7.30 to NZ$7.40 a kilo. «Such a result, combined with Mother Nature playing ball, would generate a lot of extra cash,» said Mr. Williams.
Auckland-based Westpac Bank WBC.AU +0.13% Economist Nathan Penny said he is now forecasting NZ$7.40 a kilogram, thanks to high global dairy prices and the fall in the New Zealand dollar, down around 8% against the U.S. dollar since April. Westpac had previously tipped NZ$6.50.
Westpac’s forecast «still incorporates a pessimistic assessment of China’s growth trajectory and our forecast that the New Zealand dollar will rise back to 83 U.S. cents by year-end,» from just under 80 cents today, Mr. Penny said. Fonterra’s forecast payout may even be higher than NZ$7.40, he added.
Indeed, Bank of New Zealand economist Doug Steel said he wouldn’t be surprised by NZ$7.50 a kilo. Coupled with a forecast 6% volume growth in milk production, that would inject around NZ$3.6 billion into New Zealand’s NZ$209 billion economy, he said.
 
Source: WSJ

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