KEY POINTS:
Fonterra is expected to boost its forecast of its milk payments at the end of this week following the plunge in the New Zealand dollar, providing yet another fillip to dairy farmers' incomes.
But as currency volatility and credit-market worries continue to plague financial markets, economists vary wildly
in their predictions of just how far the payout will rise above the latest forecast of $5.53 a kilogram of milk solids.
Westpac agribusiness economist Doug Steel said the kiwi's tumble could push this season's final payout above his bank's most recent estimate of $6.60/kg, but he expected Fonterra would play it much safer this week because it was so early in the season.
The dairy co-operative usually grants the public a glimpse into its crystal ball on a quarterly basis, but last month, as the dollar hit US80c, it announced it would revise the figure a month early.
Since then the dollar has fallen, closing yesterday at US69.55c.
"I don't think they'll get quite as high as $6.60 - they'll still remain pretty cautious and conservative," said Steel. "I would think they will come up with a number that is certainly bigger than their current view of $5.53 - but probably won't go as high as they will in the end because things can change in commodity markets and you don't want to get too optimistic too early."
Last month, Westpac predicted that with an average cross rate of US77c for the 2007/08 season, a payout of $6.60 was possible - a figure that could mean average dairy farmer incomes hit $711,000 for the May 2008 season.
And that outlook was based on prices of a basket of commodities - including skim milk and whole milk powders, butter, cheese and casein - falling by up to 2 per cent.
But Westpac chief economist Brendon O'Donovan said prices had continued to rise, gaining 14 per cent in the past two weeks.
Steel said an average currency of US77c now seemed "very high" given the dollar was trading at below US70c on the spot market. He believed it was unlikely the co-operative had bought hedging cover when the dollar was up around US80c at the end of July.
National Bank rural economist Kevin Wilson agreed that the drop in the dollar would enable Fonterra to upwardly revise its payout.
"$5.53 was based on an average cross rate of 71c and somewhat lower international prices than they are today. From that perspective the outlook is firmer than it was on Fonterra's forecast."
But he said dearer shipping and transport costs on the back of fuel price hikes and the cost of energy for converting raw materials into saleable product had to be considered.
Steel said the greatest uncertainty for the eventual payout was whether the "wobbles on sharemarkets and credit markets overseas" would sap world growth - particularly that of emerging markets, whose growth was a key driver of global food demand.
"If the credit and financial worries do impact on emerging market growth and commodity prices start falling on the back of it, then we might be in for a bit more of a rocky ride."
However, even under such a scenario he expected the kiwi would fall further than it had already.
A Fonterra spokesman would not comment on the impact of the currency on its payout, but noted that chairman Henry van der Heyden had said last month that the dairy exporter would benefit from a lower dollar.