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Dairy farmers' golden run may be showing the first signs of slowing, as rising costs, dry weather and the United States credit crunch threaten to bite at agricultural profits.
Niwa's principal scientist, Jim Salinger, warned last week that a moderate to strong La Nina weather pattern could bring dry conditions to the west of the North Island and much of the South Island until April, causing trouble for farmers.
Kevin Wilson, a rural economist with ANZ National Bank, said a dry autumn could hurt rainfall-reliant dairy farms in Tasman Bay, Marlborough, Taranaki and Westland. Most farms in the central and lower South Island were irrigated.
Wilson said sheep and beef farmers might fare better in a dry year than dairy farmers, as long as they reacted quickly to sell lambs and prime cattle.
The end effect on farmers would depend on just how long and dry the La Nina weather pattern was.
As for dairy payouts, Wilson said there were signs international commodity prices had peaked, but he added milk prices could fall a long way and still be very good.
"The level they're at at the moment is still exceptionally strong," he said. "If the current prices were sustained for 12 months with no change, next year's outlook would still look pretty strong, subject to the exchange rate."
Wilson said the changing US dollar would be a big factor for meat and dairy prices. Beef farmers relied heavily on the American market, and the US dollar tended to affect international prices for other food products as well.
"If international prices keep going upward, there is going to be a stronger buyer reaction than we've already seen," said Wilson. "The dairy prices the consumer is actually paying have only really started to go up in relatively recent times, and we haven't really seen what impact that is going to have."
A deepening crisis in the US economy could also reduce demand. "You could say if the American economy dips further then confidence would wane, and maybe the demand for dairy products would ease."
Rising costs could be an ongoing problem for farmers, who have been facing high fuel, electricity and fertiliser prices.
Sheep farmers faced a double challenge, as tight lamb prices failed to keep pace with very high fertiliser costs.
Relief might not come in a hurry - Wilson said fertiliser prices could rise further if world demand for fertiliser for bio-fuel crops, such as maize and ethanol, continued to grow.
On the supply side, Reuters reported last week that international dairy prices fell 1.8 per cent in December after rising for 15 consecutive months, as dairy supply increased from other countries looking to benefit from higher international prices.
The National Bank was predicting a correction to the farm-gate payout to about $5 to $5.20 per kilogram of milk-solids for the season ending May 2010.
Wilson predicted the dairy payout would need to fall to $5 or below to deter New Zealanders from converting to dairy, and Fonterra was forecasting a record payout of $6.9 per kilo- gram of milk solids this season, up from $4.46 last season.
Dairy farmers may be mulling payout forecasts as they decide how to vote in next May's re-structuring decision.
Fonterra's board has recommended to farmers that all of the company's assets, liabilities and operations be split from the co-operative and listed.
Farmers decide in May on changing the co-operative into two entities, while a second vote in 2010 will determine whether to allow the new asset-owning Fonterra company list and introduce external capital.
