KEY POINTS:
World prices for New Zealand's major exports rose 4.7 per cent last month, sending ANZ's commodity price index to a new high.
Dairy prices, which have more than doubled over the past year, rose another 7.8 per cent last month.
Dairy products make up a third of the
country's commodity exports and have been responsible for most of the 35 per cent increase in the ANZ's index over the past year.
Without dairy products it would have risen 1.3 per cent to be 5.6 per cent up on a year ago.
The gains were spread across nine other commodities. Sawn timber prices rose 5.9 per cent and are 27 per cent ahead of a year ago.
But the boom is creating losers as well as winners.
Lamb prices rose, by 3.8 per cent, the second monthly increase in a row. But they followed eight months of falling lamb prices.
ANZ economist Steve Edwards said that although international prices for beef and sheepmeat were back at similar levels to a year ago, they were about 20 per cent lower when converted into New Zealand dollar prices.
As well, the New Zealand dollar price of wool hit a 20-year low last month, he said.
But the dairy boom is indirectly improving the balance sheets of at least some sheep and beef farmers.
Bank of New Zealand economist Mark Walton said the rise in dairy prices was pushing up the value of dairying land and land suitable for conversion to dairy farming.
With dairy prices continuing to climb, Fonterra's forecast payout of $5.53 a kilo for milk solids for the 2007/08 season looked conservative even before the season got into full swing.
"A $6 payout, which is entirely plausible, would lift farmers' incomes by around $150,000 compared with the 2006/07 season and will put the best part of an extra $2 billion into the economy," Walton said.
The dairy boom had downsides, too, he said. It also pushed up domestic dairy prices and would have an inflationary effect by boosting domestic spending power.
It also had the unfortunate side-effect of supporting the New Zealand dollar at elevated levels, eroding the returns of the 80 per cent of exporters not in the dairy industry.
"The real horror scenario for the Reserve Bank would be if the dollar falls dramatically," Walton said.
"The strong kiwi has been a double-edged sword for the economy. Although dulling export returns, it has also acted as a buffer against the worst of the international commodity price increases."
Walton said it had provided an offset to high inflation in the domestic or non-tradeable side of the economy, which had been stuck around 4 per cent for nearly four years.
"But a slump in the New Zealand dollar would see the bank battling inflation on both the tradeable and non-tradeable fronts."