KEY POINTS:
An increase by Fonterra to its record forecast payout to farmers is not going to drive up inflation or interest rates, say economists.
Fonterra told farmers at nationwide meetings, which finished yesterday, that this season's payout would be at least $7 per kg of milksolids, compared to the
previous forecast of $6.90 and an actual payout of $4.46 for last season. The dairy co-operative did not specify the precise expectation, with the final quarterly update due next month.
Westpac economist Doug Steel said he expected the final payout to be $7.20, with the dairy sector bringing the best part of $4 billion more into the country than the previous year.
The increase by Fonterra would not surprise the Reserve Bank and was not enough to drive up inflation or interest rates, Steel said.
There was, however, generally severe inflationary pressure with Westpac expecting the CPI to nudge towards 4 per cent by the third quarter of 2008 and stay around the top of the Reserve Bank's target range of 3 per cent for some time.
"That certainly in our view is not going to let the Reserve Bank cut interest rates for an extended period."
Westpac expected the official cash rate to remain on hold throughout 2008 and 2009.
Steel expected the payout to dairy farmers for next season to be $6.50 per kg of milksolids.
The international price for dairy products was expected to ease further and the average conversion exchange rate for Fonterra would be higher in Westpac's view.
"It will just knock the top off it I suppose but at $6.50 I'm sure farmers will still be very pleased."
A Fonterra spokesperson said farmers could expect a payout next season that was "a little bit further south" of this year.
Fonterra supplier John Bluett, who is also chairman for Waikato Federated Farmers Dairy Section said news of a $7-plus payout was not a surprise. Contracts were set well before milk was produced which meant there was a lag effect, Bluett said.
"We ride a crest of a wave so when the spot price drops off we're still actually at a higher plateau."
Fonterra had told farmers that its value-added business had performed better than expected with the high commodity prices, he said.
Bluett said the outlook for next season was not quite so flash, with potentially a 10-15 per cent drop in payout.
National Bank rural economist Kevin Wilson said there was an offset to the latest rise in forecast payout from the recent drought, increased farm costs and poor profitability in sheep and beef industry.
In February Fonterra said the summer drought could wipe $500 million off the payout.
There was always potential for an increased payout from Fonterra, Wilson said.
"But the factors involved are numerous and not publicly available until after the event - the level of exchange rate hedging, volume and value of inventory on-hand at the end of the year, final costs of production."