Fonterra has announced it is increasing the amount farmers get for their milk solid payout from 4.05/kg to $4.15/kg for the 2007-08 season.

Fonterra chairman Henry van der Heyden said the higher commodity prices in the new year were now more than compensating for the high New Zealand dollar and the gains could be passed on to farmers.

But the increase in farm returns will not encourage dairy farmers to spend, Federated Farmers president and Himatangi dairy farmer Charlie Pedersen says.

He rejects claims the increase in payout would be a boon to provincial areas.

"Farmers have had to cope with increased costs and it is a tough season from a payout perspective."

He says farmers will welcome the increase, but most will still be in the red.

"It still irks dairy farmers, if the kiwi dollar was at US62c rather than around US70c we'd have a payout of around $5/kg of milk solids," he says.

"The dollar is taking the absolute cream off some fantastic international prices."

It is a struggle for dairy farmers and most have stopped spending, knowing farm returns will be low, he says. "Not many dairy farmers will post a profit this year. The cheque book will stay in the bottom drawer. All this increase will do for most is decrease the overdraft."

Mr van der Heyden said the longer-term outlook for prices was positive, which augured well for a higher forecast payout next season even at current exchange rates. However, he warned: "A continually climbing NZ dollar could eat away some or all of our market gains.

"While it is early days, we believe the longer term outlook for commodity prices is positive which points to an improved payout next season, but a key unknown remains the exchange rate.

While the payout is disappointing for farmers despite the 2.5 percent rise, they are enjoying a boost in milk production after a very poor start to the season.

"The spring and summer have been late and farmers have managed to make a bit of ground up since early January," Mr Pedersen said.

Source: Manawatu Standard