KEY POINTS:
Improved spirits among farmers could prove to be another difficulty for Reserve Bank Governor Alan Bollard with a survey showing a surge in those planning to boost farm spending.
The Rabobank rural confidence survey shows that the prospect of record payments for milk plus improved rainfall has lifted
overall farmer confidence to its highest point since 2000.
The percentage of farmers expecting the economy to improve in the next year has almost doubled from 22 to 40 since April - a level not seen since December 2000 - and the 43 per cent who foresaw economic decline has fallen to 26 per cent.
The surge in overall sentiment comes in the wake of this week's Quarterly Survey of Business Opinion showing general business confidence fell to a net 37 per cent pessimistic from a net 15 per cent three months ago, amid rising interest rates, petrol prices and the dollar.
Rabobank rural general manager Ben Russell said significant rainfall on the east coast during mid-June and mild temperatures and good rainfall generating strong winter pasture growth in the North Island would have helped lift overall farmer confidence levels.
Dairy farmers exhibited the greatest improvement in economic expectations, with April's 48 per cent rising to 78 per cent; its highest point in seven years.
The considerably rosier outlook follows Fonterra's record forecast payout announcement in May of $5.53 a kilogram of milk solids for the 2007/08 season, and comes as international dairy product prices continue to rise.
"Dairy farmers were last this optimistic in 2000 when the payout was $5/kg followed by $5.33/kg the next season," said Russell.
Bollard cited the improved dairy forecast in his decision to lift interest rates to a record 8 per cent in June and advised dairy farmers that spending their extra income could fan inflation.
More farmers expected their incomes to improve in the next year; 46 per cent compared with the previous survey's 33 per cent. Dairy farmers were the most optimistic about income, with 92 per cent expecting gross farm incomes to increase. However, 97 per cent also expected their costs to escalate.
And while 21 per cent of sheep farmers expected higher incomes, the number expecting their incomes to go down improved to 45 per cent from 63 per cent.
The number of farmers planning to increase farm investment over the next year rose from 21 per cent last survey to 27 per cent.
Although sheep and beef farmers were still pessimistic about the economy, the survey showed a "tentative upturn" in outlook, despite meat prices being well below last-year levels. Some 21 per cent of sheep farmers and 22 per cent of beef farmers expect the economy to improve.
Don't fence them in
* The number of farmers expecting the economy to improve in the next year has risen 19 percentage points to 40 per cent, a level last seen in 2000.
* Dairy farmer confidence has risen most, with 78 per cent optimistic the economy will improve and 92 per cent expecting incomes to lift, while 97 per cent expect costs to escalate.