Fonterra's $6.50 farmgate milk price forecast for next season is likely to lead to an increase in farmer confidence and bring forward farm spending and investment, economists say.
Fonterra yesterday bumped up its 2016-17 milk price forecast by 15c to $6.15 while also forecasting $6.50 for the 2017-18 season.
The co-operative also retained its earnings guidance of 45c-55c per share and a cash dividend target of 40c.
A clear majority of farmers were setting up for a season ''in the black''. Debt repayment would be high on priority lists as well as farm maintenance and animal health, ASB senior rural economist Nathan Penny said.
Next season's forecast was ''a shade more bullish'' than ASB had expected and it was expected it might accelerate other plans, including farm spending and investment.
''In particular, farm confidence is likely to see a larger jump than would have otherwise been the case as we enter into the new season,'' Mr Penny said.
The announcement also gave farmers a firm production signal for the season ahead and the recovery in production might be sooner and stronger than had previously been anticipated.
The strength of the opening forecast reinforced that the Reserve Bank was likely to lift the Official Cash Rate sooner than its late 2019 view and ASB continued to expect OCR increases would occur from late 2018.
Federated Farmers dairy chairman Andrew Hoggard said Fonterra's increase in the current season milk price was not unexpected and reflected the recent trend of increasing global dairy prices, which had fostered more confidence among the markets.
Based on Fonterra's forecast and current production cycles, around $280 million was expected to flow through the New Zealand dairy sector and wider provincial communities this season.
''If you take on board the amount of milk we are producing at present, this means the average dairy farm in the country will be around $23,000 better off.
''This will enable farmers to invest in their business and farm infrastructure, which has perhaps not been priority in the past two years in what has been a challenging time just trying to survive.''
Farmers would also have more money to continue investing in their environmental goals, Mr Hoggard said.
While next year was also promising, with Fonterra's $6.50 forecast and a potential injection of a further $650 million into provincial economies, farmers would be mindful of the recent downturn and the unstable nature of the markets where prices fluctuated at short notice, he said.
DairyNZ economists estimated farmers would need to commit 80%-85% of the $6.50 milk price to running their businesses.
Chief executive Tim Mackle said farmers needed to take advantage of the increases to pay down debt and carry out the likes of deferred maintenance.
This winter, cash flow would be improved with Fonterra's starting advance rate of $3.70, as against $2.50 last year, and retrospective payments coming through.
It might take three or four seasons of good milk prices for farmers to recover financially, Dr Mackle said.
National GDP was estimated to increase by $594 million, driven by the $6 to $6.50 milk price forecast increase, with a $19.2 million increase in Otago and $57 million in Southland.
Fonterra's revenue of $13.9 billion for the first nine months of 2016-17 was up 8% on the same period last year, as a result of higher milk prices.