Dairy farmers face more hardship but are happy with Fonterra's $834 million annual profit.

The dairy giant saw profit jump 65 per cent in a season the co-operative's chairman, John Wilson, described as incredibly difficult for farmers and rural communities.

Fonterra would pay out $4.30 for the 2016 season, made up of a farmgate milk price of $3.90 per kilogram of milksolids (kg MS) and a dividend of 40 cents a share. On Wednesday, Fonterra hiked its forecast farmgate milk price to $5.25/kg MS.

Hamish McNicol/FAIRFAX NZ Chairman John Wilson discusses Fonterra's annual result.

"I DON'T SEE A DOWNSIDE"

Federated Farmers North Otago dairy chairman Lyndon Strang said it will be two years before he is debt-free.

READ MORE:

* Fonterra lifts farmgate forecast by 50c

* Analyst bullish on Fonterra result

* How Fonterra benefits from low dairy prices

"This year will be about consolidating cash flow and the following year about getting back to where we were," he said

"It has made everyone focus on profitability rather than production and look at their budget critically."

Strang said the after-tax profit announcement came as no surprise. Fonterra had been "open with communication" and in a low payout year the dividend was a good result, he said.

Hamish McNicol/FAIRFAX NZ Shifting to value-added business means more stability for Fonterra, says CEO Theo Spierings.



Ashburton farmer Willie Leferink said it was better to be part of a profitable company than a non-profitable one and he had no gripes with Fonterra.

"The dividends will be calculated and distributed through a return on shares. It's a good result," he said.

Ben Juanay of Geraldine agreed. "It means the company is in a strong position; it's not indebted. I don't see a downside," he said.

STILL EARLY IN THE SEASON

Chief executive Theo Spierings said the results showed Fonterra was doing what it said it would do.

"Our results show how our strategy is creating value for our shareholders.

CHRIS SKELTON/FAIRFAX NZ Fonterra chief executive Theo Spierings says more higher value products are being produced.

"We are driving more volume into higher value products, and we are achieving results with increasing efficiency.

"We will continue to build on this strong platform to keep improving and delivering results to our farmers."

On Wednesday, Fonterra hiked its forecast farmgate milk price to $5.25/kg MS.

BEVAN READ/FAIRFAX NZ Fonterra chairman John Wilson says the company worked hard to return "every possible cent" to farmers.

This meant about an extra $78,980 for the average New Zealand dairy farmer, and nearly $1 billion nationally.

It also brought the price to 20c above the break-even of $5.05 calculated by DairyNZ.

FARMS GOING BROKE

But Waikato University professor of agribusiness Jacqueline Rowarth said farms had gone broke over the past season despite the high net profit.

Rowarth was cynical about the 50c lift in forecast, claiming it was done to soften farmers up for the annual result announcement.

"IYesterday's announcement of an extra 50 cents for this year is an attempt to say, 'Our company's doing well we are paying our farmers as much as we can, so have trust and confidence in the governance review because the company's on the right track'."

There was no reason for Fonterra to lift the milk price because little had changed over the past month, Rowarth said.

Looking at Fonterra's annual accounts, Rowarth said she could not see which components of the company were making money. It is a strategy of concentrating on volume was wrong because other countries could do this faster and more rapidly than New Zealand.

Fonterra should have focused more of its operations and its profits on the New Zealand component of its business as well as back into the hands of its farmers, she said.

PERSPECTIVE NEEDED

Federated Farmers dairy chairman and Fonterra supplier Andrew Hoggard said the low milk price compared to Fonterra's high profits needed to be seen from an economic rather than emotional perspective.

"As farmers we need to see a milk price that's completely and utterly reflective of what milk is worth in the world, and then we want to know how our company is performing and turning that milk into value-added products and adding value to that milk.

"To me, $3.90/kg MS tells me there's [plenty] of milk in the world and the world is awash in it, but the dividend and the performance - that tells me that Fonterra's doing a good job in maximising the return of that milk."

If Fonterra transferred those profits into a higher milk price, farmers may not have reacted like they had over the past year by reducing their stocking rate and brought-in feed levels.

"I would rather know what things were worth and what things were returning. We may not like it, but we need to know to make the right decisions. You want a milk price that tells you what milk is worth."

Hoggard said it was an overall good result from Fonterra. The fact the co-operative was able to make a profit in challenging times and reduce debt levels was a credit to them.

FARMERS "HUNKERING DOWN"

Wilson said farmers had responded to low dairy prices and were "hunkering down" in their businesses.

But global dairy prices were still unsustainably low, he said.

The increase to the forecast payout, announced on Wednesday, was "cautiously realistic".

"Of course, there will always be volatility. It's a very difficult dairy market, it's still difficult."

Earlier, he said Fonterra's business strategy was working well.

"We continued with the significant and necessary changes we began in the business over three years ago to support our strategy and its priorities, and worked hard to return every possible cent of value back to our farmers.

"We are moving more milk into higher-returning consumer and food service products while securing sustainable ingredients margins over the GlobalDairyTrade benchmarks, especially through speciality ingredients and service offerings."

Fonterra's revenue for the year fell 9 per cent to $17.2 billion.