Dairy sector reports are painting a bright future for the industry, with one index suggesting a potential final Fonterra payout of $7 per kilogram of milksolids.
However, while "white gold" appears to be edging toward platinum status for New Zealand, it poses mid- and long-term challenges for theeconomy as a whole because of pricing, demand and currency volatility and the effects of having a primary sector driving the economy.
Billions of unexpected dollars are being pumped into the New Zealand economy from record payouts to Fonterra shareholders from a combination of spectacular increases in global dairy prices and growth in demand - further boosted by the removal of European Union farmer subsidies.
When Fonterra lifted its forecast payout to $6.40 per kilogram of milk solids last month, the average dairy farm income of its 10,883 shareholders was increased by $207,000 to a total $690,000 for the year.
This payout level will boost the overall annual payout from last year by about $2.5 billion, to a total $8 billion.
Rachael Cross, business manager for the New Zealand stock exchange's Agrifax dairy index, said Fonterra's recent 16 per cent payout upgrade had boosted the index's prediction of the final pay out.
"If the current commodity prices are maintained for the rest of the season, and the [NZ] dollar drops below US70c, then a payout in the early $7 range should be achievable," she said in a statement.
Research for brokers ABN Amro Craigs highlighted a MAF report which has forecast total agricultural revenue to increase by 26 per cent during the next four years, or 6 per cent per annum.
"Dairy prices will remain high but not as high as currently," ABN cautioned.
The country's reliance on the primary sector left the economy cyclical and fragile, but growth in Asia had the potential to maintain momentum, the report said.
BNZ chief economist Tony Alexander said the extra $2.5 billion going into the economy from the $6.40 payout represented a "growth shock" of 1.5 per cent to gross domestic product. The dairy boom could keep pressure on the kiwi and interest rates and fuel labour shortages as workers moved to dairying.
