KEY POINTS:
Fonterra's bumper payout could hit $6 a kilo of milksolids next season in what will be a further boost for the rural economy, economists say.
The dairy giant last month lifted its forecast for the 2007-08 season by 27 per cent to $5.53, a move expected to pump an extra $2 billion into the rural economy.
Westpac agri-economist Doug Steel said he believed Fonterra's payout for 2007-08 would be upgraded further to $6 and would stay at that level into the next season.
"There's a lot of scope for powder prices to maintain where they've got to - at least in the short term."
Steel dismissed fears from some in the sector that the $5.53 forecast would not hold. He said the price was unlikely to drop because the outlook for the agricultural sector - dairying in particular - was strong.
Steel said world economic growth was going through its fastest and most prolonged period of expansion in 30 years, with income growth in China, India, Brazil, Russia, and Southeast Asia underpinning demand for New Zealand dairy products.
"From a New Zealand point of view a lot of that growth is being driven by the emerging markets. And that's a fundamental that doesn't look like it's going to change anytime soon."
Steel said the forecast boost to the rural economy was so large, dairy farmers would be able to do a "bit of everything", including paying off some debt, buying more land, perhaps buying a boat and factoring in some cost increases.
"Having done all that they can probably save a little bit as well."
However, he said land prices had already risen in response to the promised payout.
"Vendors' expectations have certainly lifted - and they probably lifted on the day the $5.53 got announced."
Agri Private Capital Fund director Andrew Watters shared Steel's assessment that strong commodity prices could see dairy payouts hit $6 in 2008.
Watters, whose company is seeking to raise up to $60 million to invest in high potential pastoral farms and agribusinesses, said rapid population growth and a rising middle class in Asia wanting high protein Western diets was set to create even more demand for New Zealand's agricultural produce.
"In China, revenues from sales of milk beverages, cheese and desserts, and yoghurt are expected to grow annually by 22 per cent, 38 per cent and 31 per cent respectively over the next five years."
He said the increasing use of large tracts of arable land to grow bio-mass for fuel instead of food was driving up grain feed costs in the US so sharply that expanding milk production there was not profitable.
However, a Fonterra spokesman said that while the outlook for dairy was certainly strong, speculation that payouts could rise to $6 was unhelpful.
Outside of dairying, however, Steel acknowledged that the picture was less rosy.
"There's certainly concern that it's not a sector-wide positivity at the moment."
While the drought in Australia had helped the dairy boom, those same conditions had made the last couple of seasons disastrous for sheep farmers, with many Australian farmers unable to feed their flock and so flooding the market with lamb.
Despite the current conditions, however, the outlook for lamb was "pretty positive", although this season would be another tough one, especially with the currency so high against sterling and the euro, Steel said.
