The forecast range is now $6.55-$7.55/kg milksolids with an advance rate schedule based on $7.05.
The prospect of a $7-plus payout puts about $17,000 more after farm working expenses into the budgets of the average Waikato-Bay of Plenty dairy farm this season.
“Cashflow projections show farmers get about half of the announced increase this season and half in delayed payments next season.”
Journeaux said the extra money will be available for debt servicing, potentially allowing payment of interest and principal in full for the first time since 2013-14.
Over the past three $6-plus payouts AgFirst budgets included two-thirds of principal repayments, equivalent to $60,000 a farm a year.
Its model is based on a 20-year table mortgage and farm working expenses about $4/kg.
The higher milk price also makes banks look good after their campaign to get dairy farmers to put a higher priority on principal repayment was criticised earlier this year.
The Fonterra increase will flow on to other dairy processors, especially to Westland Milk Products now under Chinese ownership which guaranteed to match Fonterra’s price.
Westland’s 400 farms should receive at least $1 more this season than last.
Five of the six regular dairy analysts have already predicted a $7-plus payout before Fonterra made its move last Tuesday.
They based the more optimistic numbers on milk production remaining steady but subdued around the world and sustained demand from China for dairy products.
Fonterra said the same, along with good prices already achieved for this season’s whole milk powder.
“Demand for WMP has been firm and for the full season we’re expecting it to be above last year,” chairman John Monaghan said.
“Global WMP production is down year to date and expected to continue to decrease for the remainder of 2019.
“We are also continuing to sell our skim milk powder at higher prices than European Union and United States dairy companies in Global Dairy Trade events.”
Chief executive Miles Hurrell added an explanation on the $1 width of the forecast band, citing global trade tensions and political instability in some key sales regions.
Fonterra’s new strategy to prioritise New Zealand milk is evidenced by the better prices received for the products on world markets relative to other milk-producing regions.
The prior earnings outlook for FY20 (15c-25c/share) was based on a farmgate milk price within the revised range but sales teams will have to push harder to achieve the budgeted gross margins, he said.
“So far we’re comfortable with how this season is shaping up in terms of underlying business performance.”
Federated Farmers dairy section chairman Chris Lewis said he heard a big collective sigh of relief from the country’s dairy farmers when Fonterra made the announcement.
“We have repeatedly told Fonterra not to over-promise and under-deliver and I am assured this rise in forecast is sound.”
As to whether the money will go into debt repayments, Lewis said it has not been paid to farmers yet and he is sure they won’t spend it until they get it, being very cautious and conservative.