KEY POINTS:
Fonterra has raised its forecast for this seasons' payout to a record $6.40 per kilogram of milksolids and some economists pick the final figure may top $7.
But while economists believe the final haul will be "off the planet", the dairy giant is keenly aware of global credit market jitters.
The co-operative says skyrocketing world butter, cheese and casein prices should add more than $200,000 to its farmers' incomes at the end of the season.
That means last season's average dairy farmer income of around $480,000 could rise to $690,000.
That new sum is almost $100,000 more than farmers would have earned going by the original forecast of $5.53 issued in May.
Some banks have been forecasting a final payout of more than $6.60, but none expected Fonterra to come so near to that figure so early in the season. Such confidence has prompted Westpac to suggest a final payout of $7.20.
Fonterra chairman Henry van der Heyden said the revision was a reflection of a rise of more than 50 per cent in world cheese and butter prices over the past few months, plus milkpowder prices that were holding at levels more than double historical long-term prices.
"The other commodities have come up very close to powder prices [but] we're seeing the top of the market now."
He said those increases had more than offset the strength of the dollar, which broke the US80c barrier last month but has since fallen to US71.25c.
If a lower dollar were maintained, the payout could rise even higher, van der Heyden said.
Despite continued pressure from high commodity prices on the company's ingredients and brands businessess, the company maintained its forecast value-added component at 20c.
"Our margins are pressurised, but we've got very good cost control."
However, van der Heyden said the company was all too aware of the volatililty of the credit market, which it was watching very closely.
"We're very conscious that pressure is starting to come on around credit so we're just making sure as we make the sales we collect the money as quick as we can."
While chief executive Andrew Ferrier said sales targets for the year were on track, he said the co-operative could not rule out customer sensitivity to prices.
Westpac agribusiness economist Doug Steel said the fact that Fonterra had kept its expected average currency conversion rate at US71c, despite the kiwi hitting US81c a few weeks ago, meant a $7 payout was possible by the end of the season.
"There is a lot of uncertainty with respect to world credit markets and its impact on growth and commodity prices, but if we have to put a number on it we are looking at $7.20. $6.40 is huge, but $7.20 is off the planet."
He said it was surprising Fonterra had raised its payout so early in the season, but said butter and cheese prices were playing catchup to milk power prices.
"The big question and uncertainty for us is how much the recent credit concerns impact on growth of emerging markets and if that dents demand you might see commodity prices come off."
Steel said the 87c lift in the forecast was especially notable compared with the past few seasons, when the June to September revision had been relatively small.
"Yesterday's increase was indicative of how world prices had risen by nearly a third since their last announcement in May."
National Bank rural economist Kevin Wilson doubted there was much further for butter and cheese prices to move, given the effect the price rises were expected to have on demand, although that could be diluted due the varying amount of commodity used in different products.
He said it was interesting that butter prices had moved so far and so fast because a couple of years ago dairy fat products were not very sought after.
Dairy Farmers of New Zealand chairman Frank Brenmuhl said the result would not only help farmers retire debt, offset rising costs, and reduce the industry's impact on the environment, but benefit the whole country.
Fonterra boost
* Fonterra has lifted its payout forecast by 87c per kilogram of milk solids to $6.40, only three months into its business year.
* Butter and cheese price rises of more than 50 per cent in the past three months have driven the revision, which could add $200,000 to dairy farmers' incomes from last season, and $100,000 from its May forecast of $5.53.
* Because Fonterra's payouts are usually conservative so early in the season, Westpac is predicting the final figure will hit $7.20/kg.
* That figure could boost total payout for 2007/08 to around $9 billion, up from $5.6 billion last season.
