Dairy farmers up for $250m bonanza

Record international dairy prices will enable giant farmers' co-operative Fonterra to put nearly $250 million more into the economy this year.

The company has increased its forecast returns for the third time this season.

The latest figure is an average payout of $20,000 extra for each of Fonterra's 12,000 farmers.

Economists say the extra cash will keep the rural economy running hot and is likely to put further pressure on Reserve Bank Governor Alan Bollard to increase interest rates next month.

Fonterra yesterday lifted its payout forecast from $4.30 a kilogram of milk solids to $4.50.

That would increase the amount Fonterra will pay its farmers this season to almost $5.2 billion based on last month's production forecasts.

The wet December cut milk production about 5 per cent on last season.

But that has helped maintain the good prices Fonterra is getting for its dairy products.

The production drop exacerbated tight international supply for dairy ingredients such as milk powder.

Fonterra - which accounts for 20 per cent of New Zealand's export returns - gave a warning with the good news.

Chairman Henry van der Heyden said he expected the payout to fall next year.

"Commodity prices are at record levels, but they can't remain there indefinitely," he said.

The high New Zealand dollar is also expected to affect returns next year as the buffer created by a currency hedging policy runs out.

Fonterra is paid for its products in US dollars, so as the local dollar rises, farmers get less cash back after the conversion is done.

ASB chief economist Anthony Byett said the extra cash in the economy would add weight to calls for the Reserve Bank to lift its interest rate.

Dr Bollard will announce on March 10 whether the speed of economic growth and inflation concerns make another rise in the official cash rate necessary.

"It does put the pressure on," Mr Byett said.

"Inflation expectations are now probably greater than he'd like to see."

The news would also add heat to the rural property market, he said.