KEY POINTS:
Fonterra's final payout to dairy farmers could top $7 per kilogram of milk solids if the New Zealand dollar keeps dropping, Agrifax says.
However, the bonanza poses mid and long-term challenges for the economy as a whole because of pricing, demand and currency volatility and the effects of
having a primary sector driving the economy.
Billions of unexpected dollars are being pumped into the New Zealand economy as record payouts to Fonterra shareholders from a combination of spectacular increases in global dairy prices and growth in demand - further boosted by the removal of European Union farmer subsidies.
At Fonterra's recent forecast $6.40 per kilogram of milk solids payout, the average dairy farm income of its 10,883 shareholders was increased by $207,000 to a total $690,000 for the year.
This payout level will boost the overall annual payout from last year by about $2.5 billion to a total $8 billion.
Rachael Cross, business manager for the New Zealand stock exchange's Agrifax dairy index, said Fonterra's recent 16 per cent payout upgrade from $5.53 to $6.40 had boosted the index's prediction of the final payout.
"Due to the fall in the New Zealand dollar and further gains in commodity prices, we're predicting a final payout of $6.83 at an effective currency conversion of 71c against the US dollar," she said.
"If the current commodity prices are maintained for the rest of the season, and the [kiwi] dollar drops below US70c then a payout in the early-$7 range should be achievable."
BNZ chief economist Tony Alexander was more cautious about the probability of a $7 payout, saying that if a US1c fall in the currency equated to an extra NZ10c in the payout, the US dollar cross would have to average out at 65c, a forecast he felt was too low.
He said the extra $2.5 billion going into the economy from the increased $6.40 payout represented a "growth shock" of 1.5 per cent to gross domestic product, which is presently running at more than $160 billion.
The dairy boom would benefit the economy with farm investment, but also provide challenges such as labour shortages in competing industries as workers crossed to dairying.
Research for brokers ABN Amro Craigs highlighted a Ministry of Agriculture and Forestry report which has forecast total agricultural revenue to increase by 26 per cent during the next four years, or 6 per cent per annum.
"Dairy prices will remain high but not as high as currently," ABN cautioned.
Growing Asian demand could compensate for the economy's dependence on the primary sector.
