Dairy farmers can expect a "shallow trough" over the next two years before income recovers, says a Westpac Bank quarterly report.
The Agribiz market outlook predicts a payout for the 2005-06 year of about $3.50 a kilogram of milksolids - a figure some farm leaders have described as a "break-even" point
for many dairy farmers.
But it says commodity prices in United States dollars are at high levels and by the second half of next year are likely to be much lower.
"The champagne should remain corked for now. Over the long term we still expect payouts to average around $3.90/kg of milksolids."
Fonterra this month forecast a payout of $4.23/kg this year and $3.85/kg next year.
The Agribiz report says Fonterra has opportunities to raise the average payout level.
It says growing economies around the world present opportunities to increase value-added sales and to reduce reliance on commodities.
Trimming costs is another way Fonterra could raise farmers' incomes, it says. At present every $12 million saved adds 1c to the payout.
The report predicts that over the long term, payouts should average between $3.90 and $4.
The report says beef prices should continue to rise strongly, with the US summer starting this month.
"Looking further ahead, depreciation of the NZ dollar will aid returns, although the length of the demand upswing due to diet fads can't be determined."
The report predicts wool prices will be sustained for the rest of the year.
Fine wools should benefit from an upturn in richer economies as demand for fine textiles and other luxuries increases.
- NZPA
