KEY POINTS:
Dairy farmers look set to get a bumper payout that could boost their incomes by $140,000 next season.
The farmers' marketing co-operative, Fonterra, is forecasting a 27 per cent jump in the price of milk solids next season.
The average Fonterra farmer receives about $490,000 a season, but the higher payout combined with a small expected lift in overall production could increase this to nearly $630,000.
Fonterra chief executive Andrew Ferrier said the record prices were a result of several factors including the continuing impact of reduced exports from the European Union, a surge in consumption in the United States that had absorbed excess production, and the drought in Australia.
"All of these things have created an extremely tight supply situation at a time when dairy demand has been very steadily increasing."
Federated Farmers president Charlie Pedersen attributed the world price partly to a US response to global warming.
"One of the drivers for this remarkably high price for dairy protein is the initiative that is seeing America swapping from oil to biofuels and pushing up the price of grain and making American dairy production very expensive because they feed their dairy cows on grain," he said last night.
"Soy, of course, is caught up in this whole process and soy is one of the products that is an alternative to milk products, but it is expensive now because of the swap to biofuels.
"So American initiatives against climate change are actually having a positive effect on the price that New Zealand dairy farmers are receiving on the international market."
Fonterra's 11,000 farmer shareholders can expect to receive $5.53 a kilogram of milk solids for the 2007-2008 year - up $1.18, or 27 per cent on this season's figure of $4.35.
Global dairy commodity prices have doubled in a year and Fonterra expects them to hold near that level next season and into 2009.
Mr Ferrier said: "We've seen a very remarkable rise in the last six months ... so we've factored that into the forecast $5.53 payout."
But the record milk commodity prices promising such a windfall have also savaged the dairy giant's value-added consumer brands and ingredients businesses, which have to source raw material on the global market.
Skim milk powder prices at more than US$4000 ($5500) a tonne - 33 per cent higher than just two months ago - were expected to slash the value-added component of the payout from 51c to just 20c.
Matamata Mayor Hugh Vercoe was thrilled: "This will have a tremendous effect.
"We have so many dairy farmers in this area and the payouts they have been getting have been down for some time.
"This extra injection of cash will flow to the three main towns here and will have a significant impact.
"It will also put more pressure on land prices and I would think if any dairy farmer wanted to get out of farming it will be a lot easier."
Mr Pedersen said the forecast payout was "excellent news".
"From a farm account point of view it will balance up the pain dairy farmers have felt this year and last year."
It was also good news for the economy, particularly the rural servicing sector, he said.
"You are not going to see lots of new tractors and cars but rather money being repatriated back to the banks that have covered the long-term debt for this year and last year."
Dairy Farmers of New Zealand executive member Dean Bailey said the last couple of years had been pretty tight for many farmers who had been struggling in the face of increasing compliance and production costs.
But the forecast - if it came to fruition - would be well received.
However, he said such speculation could also drive up land values.
Milky way
* Fonterra predicts continued strength in global dairy prices will allow next year's payout to rise 27 per cent.
* The value-added part of the payout - based on the profits of its brands and ingredients businesses - could shrink from 51c to 20c.
* Farmers are pleased, but say the windfall will mostly service debt and could further inflate rural land prices.
