KEY POINTS:
Fonterra's dairy farmers, already watching their milk turn into "white gold" on world commodities markets, were told on Friday that they can expect an even bigger bonanza this season.
The current dairy-price boom might mean a payout of $700,000 for the average farmer.
Westpac chief economist Brendan O'Donovan
predicted that Fonterra's payout for the 2007-08 season would rise to $6.60 a kilogram of milksolids.
That's more than a dollar higher that Fonterra's own forecast of $5.53 and way higher than the $4.53 forecast payout for 2006-07. Fonterra will announce the final payout for the 2006/07 season this week.
If O'Donovan is right, the economies of dairying areas would be buried under a tidal wave of extra money.
This season's forecast payout - calculated on an average exchange rate of US71 cents - would be $6.91 billion for farmers on an expected production of 1.25 billion kg milksolids.
Dairy commodity prices climbed 72 per cent over the year to May - 48 per cent in New Zealand dollar terms.
Since then, prices have risen another 15 per cent.
Price hikes of more than 2 per cent a week since May mean commodity prices have doubled in a year - outstripping the NZ dollar.
Commentators say there has been a repricing of food commodities because of drought and other constraints on water in Australia and China and the increasing use of land in the USA and Brazil to produce crops for biofuels. "International commodity prices have gone ballistic," O'Donovan said.
If, as Westpac suggested, this season's payout jumped to $6.60 the "average" Fonterra farmer would perhaps have an income in May 2008 of $711,000. The total industry payout would be $8.25 billion.
Fonterra declined comment on Westpac estimates - its own forecasts are reviewed quarterly with the next due in August.
Dairy farmers will welcome record returns but the news is not all good.
High milk prices make it hard for Fonterra's own value-added operations and fast-moving consumer goods to make profits.
The same problem will hurt dairy companies, such as Tatua and Westland, relying on processed products.
Fonterra's milkpowder business has concerns too about the extent to which current zooming prices might turn key customers to substitutes.
PGG Wrightson deputy chairman Craig Norgate has warned farmers that Fonterra needs to act quickly to negotiate long-term contracts at below current spot prices because record prices were encouraging substitution.
"I'd be starting to do long-term deals with customers to ensure that the demand is there long term."
But Fonterra chief Andrew Ferrier has said that prices near US$5000 ($6385) a tonne will not reduce demand for dairy, and Dairy Farmers of New Zealand chairman Frank Brenmuhl said he did not think there was resistance in the global marketplace and there should be no hurry to fix long-term contracts.
"We don't expect [prices] to stay up there forever but until such time as we actually start to see a tipping point I wouldn't be in a hurry to fix long-term prices at a lower level than I thought I could achieve," Brenmuhl said yesterday.
The huge flow of extra money into the rural economy would also make it even harder for the Reserve Bank to control inflation. The bank is due to review interest rates next week, with financial markets expecting another rise in the official cash rate.
Federated Farmers' president Charlie Pedersen, a dairy farmer himself, fears the dairy industry could become a scapegoat for any further interest rate rises.
- NZPA